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Pressure on interest rates

Cheap interest rates could soon be harder to find.

Friday, February 22nd 2013, 2:41PM

by Susan Edmunds

Wholesale interest rate swap yields have been rising since the beginning of the year, putting pressure on banks to raise their interest rates.

The most notable wholesale rises have been in the middle of the swap curve, for terms between three and seven years.

Westpac chief economist Dominick Stephens said that for a while that rise had been tempered by a drop in the margin banks have to pay over the top of those wholesale rates.

An improving global financial situation had made overseas lenders more willing to lend to New Zealand, he said. “At the moment New Zealand is considered a fantastic bet so the margins have been coming down.”

But he said looking forward from today, the high wholesale rates might become more of a factor.

BNZ chief economist Tony Alexander agreed the wholesale rates would push up banks’ home loan rates. “Eventually it will happen but it depends on the degree of competition between banks and how they choose to manifest that.”

He said borrowers should keep an eye out for a cheap longer-term rate and fix half their mortgage if they found one.

Stephens said fixing was a better option than floating. “Our view is that the floating rate will go up enough in future to make paying a little bit more now worthwhile."

Rates up to two years are still cheaper than floating rates.

Stephens said most people were waiting until the Reserve Bank was on the verge of hiking the official cash rate to fix their mortgages. But he said with everyone employing the same strategy,  a rush to fix would push rates up sharply.  “If people en masse decide to fix, we will see a big increase in wholesale interest rates, much sharper than we’ve seen over the last few months.”

In December 2012, there was $96.6 billion of mortgages floating and $82.6 billion fixed, from $102.4 billion floating and $73.8 billion fixed in August last year.

Mortgage approvals in the week ended February 15 recovered sharply, to 7515  from 5838 the week before.

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Westpac predicting rates to rise faster than forecast

In its recently released quarterly economic overview report, Stephens writes that Westpac’s prediction is for 90-day interest rates to rise much faster than either the Reserve Bank or the market expects.

It picks the first move in interest rates to happen in June 2013, when it says the OCR will still be at 2.50%.

By 2014, Westpac expects 90-day rates to be 4%. By comparison, the RBNZ tips them to have barely moved at 2.75% and the swaps market implied pricing puts them even lower, at just over 2.50%.
By 2015, Westpac expects rates to be over 5%.

Stephens’ report said that the Christchurch rebuild would make it hard for New Zealand to avoid substantial inflation.

“The inflation figures suggest that central co-ordination of small to moderate repairs – the bulk of the activity to date – has been effective in limiting construction cost inflation. This is unlikely to remain the case as major repairs and rebuilds take over as the main form of activity.”

He pointed to the fact that new housing in the Canterbury region has already risen roughly 10% over the past year.

Stephens said he expected home loan rates to follow the same trajectory as 90-day rates. They might stay on hold for another year or so but then would have to rise.

“Floating rates may not rise quite as rapidly as 90-day rates because at the moment banks have to pay a higher margin to procure funds from overseas. That pressure might come off.”
But he said it was unrealistic to expect the current historic lows to continue past 2013.


Disclaimer: Every possible effort has been made to keep the information in the rates tables as accurate as possible, however, neither the publishers of Mortgage Rates nor anyone engaged to compile these tables accept any liability for inaccuracies or any loss suffered as a result. It is strongly advised that readers check loan details directly with the provider concerned.

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