Mixed outlook for mortgage rates follows latest Reserve Bank and Feder
The Reserve Bank has kept its Official Cash Rate at 4.5 per cent. That's good news for floating rates, but fixed rates could be pushed up by US moveses
Wednesday, May 19th 1999, 12:00AM
by Paul McBeth
While that may be good news for floating mortgage rates, fixed rates are more likely to be affected by what's happening in the US and there it's a different story. US central bank the Federal Reserve has just come out with a formal signal that it's prepared to lift interest rates to curb inflation, after holding an officially neutral stance on rates since last November.
Why that's important to New Zealand homeowners is that changes in US long-term interest rates influence our own long-term rates and therefore the cost of funding fixed rate loans.
Bankers Trust executive vice president Roger Kerr says the US markets had been expecting the Federal Reserve's move and had already started to push up rates, with New Zealand 10-year bond rates in turn rising from 5.20 per cent at Christmas to around 6.20 per cent. He's tipping that will continue up to 7 per cent in coming months.
Kerr says this creates an 'interesting situation' for mortgage rates.
"While the financial markets look to ten-year interest rates, the three to five year bond market is more important for people with mortgages and there are two forces pulling on those. The ten year rates are being pulled by the US market and then, at the short-term end, the 90-day wholesale interest rates are now effectively regulated by the Reserve Bank."
He says the US move is likely to mean increases for fixed rate mortgages. That's already started to happen with BankDirect, for one, announcing a series of rises last Friday.
For floating mortgage rates, the stable OCR should keep things steady in the meantime. The catch is that, if and when it is increased, floating rates could go up with a jolt.
Kerr's concerned that the Reserve Bank may be too positive in its outlook.
"The great danger is that, if the RB has got it wrong - if towards the end of this year it's proved that it was too relaxed in May and inflation is rising - there could be a really dramatic rise in floating rates," he says.
"So it's a tradeoff for mortgage holders. They can fund cheaper in the meantime (through floating mortgages) as fixed rates move higher. But they should be aware that floating rates could move higher at the end of the year."
The Reserve Bank certainly seems gung ho for the time being, with Governor Don Brash commenting today that a steady economic recovery was now well under way and inflationary pressures appeared to be "well in check". The announcement of the OCR review this morning was made in tandem with the release of the Bank's May 1999 Monetary Policy Statement.
Brash also noted that world markets appeared to be anticipating a robust global recovery and, in particular, a significant rebound in commodity prices.
"This appears to have driven the substantial appreciation in the New Zealand and Australian currencies in recent months. This rise in the exchange rate means monetary conditions have tightened more than we projected back in March."
However, Brash said the Reserve Bank's view was that global economic fundamentals weren't as strong as this suggested and the exchange rate rise could be temporary, so there was no immediate need to alter the OCR.