by Paul McBeth
Next Wednesday (March 15) is the Reserve Bank's next review of the Official Cash Rate. As the pundits are tipping an increase of as much as 50 points, to 5.75 per cent, mortgage lenders are likely to increase their floating and short-term fixed rates even before any announcement. Those interest rates are also likely to continue rising until later this year, and not ease back until mid to late 2001.
Why is the RB expected to raise the OCR? Potential inflationary pressures are a key concern, and right now there's no help coming from the feeble exchange rate to keep interest rates in check. As Lindsay Hore from Forsyth Barr puts it, "in comic-book superhero words, in the fight against the dreaded inflation, interest rates could be described as BATMAN and exchange rates would be ROBIN - always expected to help but, at the moment, kind of useless!"
However, longer-term interest rates have actually been falling recently, with a number of lenders cutting rates for the likes of five-year fixed terms. That means the yield curve is flattening out; in other words, the difference between short and long-term rates is narrowing. Some commentators are even predicting a return to a negative yield curve (where short-term interest rates are higher than long-term), last seen 18 months ago.
But back to the floating rates: some economists are forecasting these will reach nine per cent by the end of the year. Apex Mortgages managing director Kieran Trass takes an even gloomier view and tips they could reach 10 per cent or even higher. Aside from the RB's actions, he says one reason is that lending volumes are down and he suspects that banks are increasing their margins.
"Banks can justify sacrificing some profit if they are growing their loan portfolio," Trass says, "but when it's not growing they will not sacrifice profits."
Mortgage bankers Cairns Lockie has also noted an increase in bank margins, commenting that some trading banks were holding five-year rates around 9.30 per cent in spite of a drop in the associated wholesale rates (Cairns Lockie cut its five-year rate last Friday from 9.15 per cent to 9.05 per cent).
So what to do? BNZ chief economist Tony Alexander always heads part of his monthly New Zealand Observer "If I was a mortgage borrower, what might I do this month?" For some time now, he's favoured a combo of the two-year fixed rate with some on floating (to balance the risk and allow for some early repayment), based on where he thinks interest rates are heading.
In the March Observer, Alexander says his personal preference is still for two-year fixed, but he'd also consider three years "if I was a bit more risk averse". He tips that floating mortgage rates will average as much as 9.6 per cent over the next couple of years, well above the current two-year fixed borrowing rate of 8.7 per cent.