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Confidence on interest rate cuts next year vanishes

Optimism there will be OCR and interest rate cuts next year could be misplaced.

Wednesday, September 6th 2023, 10:34AM 2 Comments

by Sally Lindsay

Independent economist Tony Alexander says whichever party is elected in October, it will have to tighten fiscal policy and rein in spending because of a deterioration in the Government’s accounts.

The government’s published accounts for the 11 months to the end of May showed tax revenue was more than $2 billion behind where Treasury had forecast it to be at the budget and slow or near-zero growth is expected to deepen this deficit.

The Reserve Bank recently released its predictions for the economy and inflation, including the government's accounts. “This financial year’s predicted deficit was 0.8%, but that has now blown out to 2.3%”, Alexander says.

On top of that, the International Monetary Fund (IMF) has issued a blunt warning that the country is at risk of falling into a deeper recession than the October to March this year recession which it has just climbed out of. It is predicting the country will have the second lowest growth of the 159 countries it monitors – just ahead of Equatorial Guinea.

Finance minister Grant Robertson has already reacted to the expected deficit by shaving $4 billion off spending off and asking government departments to find other efficiencies, which Alexander says “could have been found five or six years ago as well”.

If advisers think they have got some inside word on timing for either tax cuts next year or the year after or spending increases, Alexander says they should pull back on the optimism because this is something any new government is going to have to address after the October 14 election.

He says the deficit blowout could cause a bit of upward pressure on interest rates, although the recent lift in banks’ rates has nothing to do with the domestic economy, rather it’s worries about inflation next year in the United States.

“It is leading to reduced expectations of monetary policy easing there, which has just led to an increase in the medium to long-term fixed interest rates in US markets, which has fed through to New Zealand.

“One of the factors also pushing up US wholesale interest rates has been concern about an increased volume of debt issued by the US Treasury. Alexander says a similar factor has been in place in New Zealand as well.

“The government's accounts are deteriorating significantly because businesses are having their profits squeezed by costs going up, but not being able to pass on those cost increases into selling prices as much as they would like to do so tax payments to the government are going down.”

Borrowers drift to longer terms

As major banks have lifted interest rates, mortgage borrowers are favouring longer-term fixed rates.

The latest RBNZ data on residential mortgage lending shows total lending was $5.2 billion in July, down 16.9% from $6.2 billion in June. In comparison to July 2022, new residential lending fell 12.8% from $5.9 billion.

The share on fixed interest rate terms continued to rise to 81.7%, up from 79.6% in June, however the share on floating terms fell to 18.3% – the lowest on record.

The most popular interest rate term for new owner-occupier mortgage lending was one-year fixed, with this term accounting for 27% of all new lending, a small fall from 27.1% in June.

Lending on two-year fixed terms rose notably to 22%, up from 18.3% in June. On the other hand, the share of lending on three-year terms saw a sharp decline to 12.2%, down from a recent high of 16.3% in June.

Residential investors lending showed similar trends as owner occupiers. In particular, there was an increase in the share of new lending on two-year fixed terms and a drop in the share of lending on three-year fixed terms.

Tags: OCR

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Comments from our readers

On 6 September 2023 at 12:19 pm valkyrie6 said:
So, hang on a minute Tony, you were the economist telling people to only fix for 12 months due to rate coming down and now it looks like rates will continue to rise, anyone listen to you have now potential lost thousands of dollars when their 12-month rate jumps to 7.85% when they could lock in for 2 or 3 years at 5.99%.
Nice one Tony.
I think you also said house prices were going to rise and buying now was a great option.
On 6 September 2023 at 1:40 pm Amused said:
Well said Valkyrie. It’s irresponsible of economists like Tony Alexander to be making interest rate predictions especially when they have been proved so famously wrong before during the GFC. Many borrowers both past and present have unfortunately taken what economists like Tony say as gospel when they decide how long to fix their loan repayments for.

If Tony’s predictions about interest rates falling are now wrong what makes any of us think that he can be believed when he talks about house prices increasing next year or migration having any significant impact on the price of housing. Even the most optimistic mortgage adviser would have to question the loan affordability of borrowers able and willing to pay vendors more for their property than where houses values currently sit.

Tony went as far as telling people a few months (TMM – 21st April 2023) that they shouldn’t delay their planned house purchase because they might miss out on the next housing boom. This article was titled “Buy now Alexander tells advisers”. And where have house prices gone since April? Down.

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Full Rates Table | Compare Rates

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 ▼7.45 ▼7.09 ▼6.95
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
ANZ Special - ▼6.85 ▼6.49 ▼6.35
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 - - -
SBS Bank 8.74 7.74 7.09 6.95
Lender Flt 1yr 2yr 3yr
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
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 -
Lender Flt 1yr 2yr 3yr
Westpac 8.64 ▼7.49 7.35 6.99
Westpac Choices Everyday 8.74 - - -
Westpac Offset 8.64 - - -
Westpac Special - ▼6.89 6.75 6.39
Median 8.64 7.14 6.82 6.65

Last updated: 18 July 2024 10:19am

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