Explaining rising interest rates

At the moment there is confusion about how banks have raised their fixed mortgage rates recently despite the Reserve Bank stating in May that it didn’t feel rates needed to go any higher.

In spite of its position not changing last week, which was completely factored into financial market pricing of fixed rate debt, banks raised their fixed rates again.

“When a bank lends at a two-year fixed rate, it does not fund that loan by borrowing at a floating rate. That is dangerous because if floating rates should rise because of new inflation concerns its profit will be slashed.

“The bank will fund the loan by borrowing at a two-year fixed rate in the wholesale market. This is called the swap rate. If the two-year wholesale interest rate goes up, then a bank will eventually raise its two-year fixed lending rate. But this does not happen immediately.