Rates increasingly look like they have peaked

Rates increasingly look like they have peaked

Hands holding phone showing rates graph

Two weeks have gone by since I last wrote about prospects for mortgage rates in New Zealand and gave the view that we are at or very close to the peaks for fixed rates of two years and beyond.

Have we learnt anything in the past fortnight to challenge that view?

Not really. Inflation numbers have come out higher than expected offshore so expectations have grown that central banks will continue to raise their interest rates at a rapid pace. But therein lies some important information. The speed with which interest rates will go up is not actually reflective of the state of economies offshore which are slowing down rapidly.

There is a high expectation of recession soon in Europe due to soaring energy costs, and potential weak if any growth in China because of their continuing pursuit of an eradication policy for Covid-19. The US economy may already be in recession.

So why are central banks so gung ho about pushing up their overnight interest rates?

Because they need to regain credibility as inflation fighters. The credibility for all of them and not just our own distracted central bank has been dented by their combined failure to recognise the strength of growth in their economies last year and the surge in inflationary pressures.

To prevent people forming a view that they have gone permanently soft on inflation they are pushing their chests out and now acting decisively.

But with economies weakening away and the chances of a global recession rising, expectations have grown that once the central banks finish taking rates quicky up they will then undergo a period of quicky cutting them again before the end of 2023 – though not to the same extent to which they are rising.

In the United States for instance the markets are pricing in three rate cuts before the end of 2023 from levels higher than where the main overnight cash rate is currently. Economists are predicting a rapid easing of inflation to below 3% come the end of 2023.

Here in New Zealand the markets have reacted to these changing expectations for rate movements offshore by reducing the fixed wholesale funding costs which banks face when they raise funds to lend to you and I at fixed rates.

The two year swap rate which banks pay for instance has fallen to around 4.0% from 4.5% in the middle of June. The five year swap rate has fallen to near 3.8% from 4.5% also in mid-June.

There is now no pressure on banks to raise rates for three years and beyond to recoup margins and only slight upward pressure on the one and two year rates.

I feel more certain in my comment that most rates have about peaked

Especially in light of evidence from one of my surveys that upward pressure on rents is easing. Also, international oil prices have fallen away and the near record low levels of consumer and business sentiment in New Zealand tell us that pricing pressure could easily soon be downward in many sectors rather than upward – though supply chain problems boosting materials prices will still see prices creep higher for most things in the coming year.

It all means that if I were a borrower at the moment I would still only be thinking about fixing for one or two years, with decreasing interest in the latter. And be aware that at some point in the coming 6-9 months one will be highly incentivised to simply opt for a floating rate – but we are not at that point just yet.

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