The RBNZ is also very cognisant of a rising NZ dollar and the risks that the NZ dollar could appreciate considerably more, mainly because the NZ dollar may get swept up in the weakening US dollar frenzy - "... the US dollar which seems to be on a trend decline with some way to go", says the RBNZ.
There is also an acceptance, though, that there is very little that can be done to prevent further New Zealand dollar appreciation should the United States dollar depreciate. The more important focus for the monetary authority is to restrict the NZ inflation rate.
Here an important long-term influence is the rate of non-tradable inflation. Which also happens to be the source of inflation over which the RBNZ has most leverage.
This is where the RBNZ warnings of possible interest rate hikes become relevant. An important source of domestic inflationary pressure at present is the housing market: because higher housing costs are adding directly to inflation; because the housing market is drawing in a lot of staff, workers that are proving hard to find almost everywhere; and because higher house prices and higher household debt are encouraging greater spending in general.
The Governor has in recent weeks repeated warnings that the housing market may be about to peak. New housing supply is increasing just as the rate of demand growth is slowing (due to lower net immigration). Plus the RBNZ believes that higher interest rates will probably be required over 2004.
The warnings have been accompanied by the message that the cash rate would probably be hiked in the first quarter of 2004 and now by assumption that the 90 -day bank bill will average 5.75% in the first half of 2004, a rate around 0.6% higher than the average over the last couple of months. The warning is clear: short-term rates - including the variable home loan rate - are about to rise.
The RBNZ appear to be thinking in terms of rates 0.5-1.0% higher next year. The markets suggest the latter rather than the former. Such a rise would be modest compared to the 5.5% 90-day rate increase in 1994 - that's right, within 12 months - but it could still prove costly considering the higher levels of household debt.
The difficulty is, as always, no one really knows the future. It is all very well saying that the rate increase could be modest. But it could be less should the NZ dollar head sustainably higher. And it could be a lot more should local spending continue strongly and supply bottlenecks emerge. It is the latter risk that is greater now that it has been for some quarters and a risk that warrants close consideration of fixed rate loans.
Here too rates are likely to go higher next year. Which is all the more reason to be locking in rates now. And to be locking in rates for 2-3 years (or more) rather than just for 6-12 months. Admittedly the 2-3 years rates are higher than variable rates at present but the fixed rate today will more likely be less than the average variable rate over the next 2 or 3 years.
If that's not reason enough then consider also your anxiety levels - they could well be tested next year.
This is an extract from ASB Bank's home loan report.
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