At the same time as hopes for world growth have deteriorated in recent weeks optimism about the speed with which inflation rates will come down has deteriorated. The outcome has been a decent hike in wholesale borrowing costs in the United States and that has flowed through to higher bank borrowing rates here as well.
The cost to NZ banks for instance of borrowing at a two year fixed rate to lend fixed for two years has risen to near 4.3% from 3.8% a month ago.
So what’s happening around the world?
The worsening global growth outlook reflects extra upward pressure on energy prices in the UK and Europe as a result of Russia all but entirely stopping flows of gas through its westward pipelines as part of its war effort. In addition, at the moment over 60 cities in China are in full or partial lockdown as China continues to pursue a covid eradication strategy rather than roll out modern and effective (Western) vaccinations.
China’s deepening woes are accentuated by growing weakness in the housing market as people refuse to service their mortgages on properties not yet finished and cease ordering new apartments as they see prices falling.
In the United States the picture is somewhat better with recent data releases being slightly stronger than expected. But Federal Reserve officials have made it clear that if necessary they will cause a recession if that is what is needed to ensure inflation is comfortably on track back towards 2%.
There are a great number of highly uncertain factors in place and no-one should feel any great certainty about what interest rates will do and how quickly they will do it in the coming year. But at least here in New Zealand we do not have the extra upward pressure on inflation coming from soaring electricity bills in some countries. Our grid mainly carries electricity from renewable sources, not gas and coal.
The chances remain strong that our central bank will lift its official cash rate from the current 3% towards 4%
And that will cause a 1% rise in floating mortgage rates. But as previously noted bank borrowing costs for lending at fixed rates reflect expectations for where the official cash rate is headed not where it is now, and those expectations have been locked into the rate reaching at least 4% for some time.
However, the markets have shifted away from pricing in a cut in the cash rate late next year with no cut now currently expected until late in 2024. That means scope for any further reductions in bank fixed mortgage rates in the near future are virtually zero. In fact, the pressure is for them to rise.
But banks are likely to accept compressed margins for some time
This is because of the intense competition for mortgage business, especially with regard to retaining existing customers who are facing refixing at twice the rates they locked in last year and are actively searching for the best rate on offer.
Banks are concentrating their competition at the one year time period and that means that less than a year from now banks are still likely to be accepting lowish margins to ensure they keep the overwhelming bulk of their clients as they yet again refix their interest rates.
Greater certainty is of course gained by fixing for a longer time period and the 0.4% jump from fixing one year to fixing two years is not all that much. For some borrowers having a portion of the debt fixed for two years may be a good and affordable idea. Making the additional jump to fixing three years at near 5.69% however is likely to be too big a call for most people – including myself if I were a borrower currently.
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