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Don’t count on interest rates falling any time soon

The ANZ Bank says it is premature to believe that the Reserve Bank has done with OCR hikes and interest rates won’t rise any further.

Monday, July 3rd 2023, 10:57AM

by Sally Lindsay

Growth is slowing, there are pockets of real weakness in the economy and technically the country has been in a shallow recession, Sharon Zollner, ANZ’s chief economist, says.

“Inflation is also falling, but we don’t think it’s falling quickly enough, especially in the service sector, and of course, house prices look like they have bottomed out and will rise through the rest of this year,” she says.

“We think we’ll be lucky if we don’t see at least one more OCR hike eventually as core inflation pressures prove a bit stubborn.”

If the RBNZ is forced to deliver another hike (or two), Zollner says mortgage rates may rise further yet.

ANZ break-evens show that mortgage rates need to fall rapidly to make it cheaper in the long run to fix short and roll repeatedly as opposed to fixing for longer.

That reflects a combination of both narrower lending margins and a change in the shape of the wholesale yield curve, which is now very much inverted. The one-year swap rate is 5.79%, but the three-year swap rate is 5.02%. This has made the mortgage curve inverted too.

This is important, as wholesale yield curves are only inverted because markets believe the RBNZ has finished hiking and will be easing relatively soon. For its part, the RBNZ has said something similar. Although it is projecting OCR cuts in late 2024, they are highly conditional on inflation getting back to target.

Zollner says the country is in a situation where markets and yield curve – via implied forward rates, or break-evens – are saying rates will fall soon, and the trick for borrowers is to figure out whether what’s priced in is too low or too high.

“If rates fall faster than implied by break-evens, borrowers will be better off fixing for a shorter period and rolling repeatedly. If they fall more slowly, a longer fix will work out cheaper.

“According to the old fable, a bird in the hand is worth two in the bush. This is what’s going on here in terms of lower long-term rates versus higher short-term rates, and the hope that rates fall in the future. Fix for longer and get a lower rate; or fix for shorter and hope rates fall. It’s a tough call, but on balance, we see merit in the former, or a mix of both if borrowers want to hedge their bets,” she says. 

As ANZ’s breakeven table shows, fixing for three years now at 6.34% will cost the same as fixing for one-year at 7.01% and rolling for a year at 6.08% in year two and 5.94% in year three.

“Those are rapid falls, especially with the RBNZ saying it’s not cutting till Q3, and that being conditional on falling inflation,” Zollner says.

“Of course it might happen but the point is that it must happen for shorter-term fixes to work out cheaper. Choosing three years now is already cheaper, and is of course more certain, which may appeal to some borrowers.”

She says it isn’t just the “bird in the hand” argument, which essentially says take what you can get when you can get it, behind the bank’s view that borrowers might want to consider fixing at least some debt for longer.

Tags: ANZ

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Lender Flt 1yr 2yr 3yr
AIA - Back My Build 6.19 - - -
AIA - Go Home Loans 8.74 7.14 6.75 6.39
ANZ 8.64 7.74 7.39 7.25
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
ANZ Special - 7.14 6.79 6.65
ASB Bank 8.64 7.14 6.75 6.39
ASB Better Homes Top Up - - - 1.00
Avanti Finance 9.15 - - -
Basecorp Finance 9.60 - - -
Bluestone 9.24 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Classic - 7.14 6.79 6.65
BNZ - Green Home Loan top-ups - - - 1.00
BNZ - Mortgage One 8.69 - - -
BNZ - Rapid Repay 8.69 - - -
BNZ - Std, FlyBuys 8.69 7.74 7.39 7.25
BNZ - TotalMoney 8.69 - - -
CFML Loans 9.45 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - 6.79 - -
Co-operative Bank - Owner Occ 8.40 6.99 6.79 6.65
Lender Flt 1yr 2yr 3yr
Co-operative Bank - Standard 8.40 7.49 7.29 7.15
Credit Union Auckland 7.70 - - -
First Credit Union Special - 7.45 7.35 -
First Credit Union Standard 8.50 7.99 7.85 -
Heartland Bank - Online 7.99 6.89 6.55 6.35
Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society 8.90 7.60 7.40 -
HSBC Premier 8.59 - - -
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 7.85 7.05 6.69 6.59
Lender Flt 1yr 2yr 3yr
Kainga Ora 8.64 7.74 7.35 6.99
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 8.50 7.99 7.79 7.55
Kiwibank - Offset 8.50 - - -
Kiwibank Special - 6.99 6.79 6.65
Liberty 8.59 8.69 8.79 8.94
Nelson Building Society 9.00 7.65 7.25 -
Pepper Money Advantage 10.49 - - -
Pepper Money Easy 8.69 - - -
Pepper Money Essential 8.29 - - -
Resimac - LVR < 80% 8.84 8.09 7.59 7.29
Lender Flt 1yr 2yr 3yr
Resimac - LVR < 90% 9.84 9.09 8.59 8.29
Resimac - Specialist Clear (Alt Doc) - - 8.99 -
Resimac - Specialist Clear (Full Doc) - - 9.49 -
SBS Bank 8.74 7.74 ▼7.09 ▲6.95
SBS Bank Special - 7.14 ▼6.49 ▲6.35
SBS Construction lending for FHB - - - -
SBS FirstHome Combo 6.19 6.14 - -
SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.95 - - -
Select Home Loans 9.24 - - -
TSB Bank 9.44 7.79 7.55 7.45
Lender Flt 1yr 2yr 3yr
TSB Special 8.64 6.99 6.75 6.65
Unity 8.64 6.99 6.79 -
Unity First Home Buyer special - 6.55 6.45 -
Wairarapa Building Society 8.60 6.95 6.85 -
Westpac 8.64 7.84 7.35 6.99
Westpac Choices Everyday 8.74 - - -
Westpac Offset 8.64 - - -
Westpac Special - 7.24 6.75 6.39
Median 8.64 7.19 7.17 6.65

Last updated: 12 June 2024 4:04pm

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