ASB Bank chief economist Anthony Byett gives his opinion on where interest rates might be heading.
Wednesday, February 13th 2002, 11:17PM
An opinion The usual
proviso: what interest rates will be next year or the year after is
unknown. Nonetheless, borrowers are regularly faced with the
decision about whether to float or fix loan rates and, if fixing,
for how long? The situation will differ for each person. The following
notes put aside these personal issues and offer an opinion
about what might happen to loan rates. Be warned however.
Economic events can unfold in many ways and interest rates will
respond to each new situation.
The key driving force to interest rates
at present is the global slowdown and probable recovery. Short-term
or variable rates have been pushed to low levels, especially
offshore, to stimulate flagging economies. These cuts will be
temporary. The contentious issue, though, is how temporary? Central
banks will push short-term rates back closer to the average of
recent years when they believe each economy has regained a growth
momentum.
Pricing for 2-year to 5-year rates
already include anticipations that these moves will come
around mid 2002. If correct, the issue then becomes how high
will central banks push short-term rates?
There is the
chance, though, that the economic recoveries expected in the
US and elsewhere do not emerge, at least not until later in
the year or until 2003. In this case, short-term rates could
stay lower for most of 2002 and 2-year to 5-year rates could
actually decline slightly.
At this stage, the more probable scenario
is global recovery and higher rates. It is not unusual for the
variable home loan rate to rise around 1-2% in the early and middle
stages of an economic growth surge. That is, the ASB Bank Variable
Home Loan rate could well be in the 8-9% region (ie: close to the
long-term average) by the end of 2002.
Hence, two generalisations follow from these
thoughts:
*
with rates generally low, there are good opportunities
for fixing rates for 2-5 years;
*
and with rates likely to increase early 2002, fixing now
rather than later may be
prudent.
The following graphs and comments
highlight some of the key trends and factors with 1, 2, 3 and 5-year
ASB Bank fixed home loan rates.
The 1-year fixed rate, although
higher in recent weeks, is low. Rates above 7.0% are more the
norm. The current low 1-year rate is a direct result of slow
global growth. ASB Bank economists believe that economic
pickups are imminent and that interest rates will
rise.
Advantage of 1-year: low rate for next 12
months; opportunity for low rate next year also if global
recession prolonged.
Disadvantage: a quick
economic recovery however will mean higher rates after fixed
term.
The 2-year rate is priced
consistent with a modest New Zealand growth phase in late
2002.
ASB Bank economists are picking a rapid growth
phase in New Zealand from mid 2002.
Advantage of 2-year:
low rate locked in for 2 years.
Disadvantage:
missed opportunity for lower rates should economy worsen; but
also risk of higher rates after fixed term if eventual pickup
is rapid.
Also relatively low, the 3-year
rate prices in economic growth but not necessarily much chance
of strong New Zealand growth.
ASB Bank economists suggest strong
New Zealand economic growth is a distinct
possibility.
Advantage of 3-year: lock in low
rate through probable period of rising interest
rates.
Disadvantage: missed opportunity should
global and local economies worsen and rates fall
again.
Fixed 5 year rates have typically
offered good value on the occasions that they are below 8.00%.
Rates at present at close to this mark, suggesting the
'bargain' levels have gone.
The key advantage -
surety for 5 years - however still
remains.
Disadvantage: missed opportunity if
rates do decline further or remain low for some years; a
higher early repayment fee should rates
decline.
The last word: nobody knows the future.
The above notes hopefully help with the decision about fixing loan
rates. They at least provide an historical and economic perspective
to your decision. They do not, unfortunately, indicate what will
happen.
