ASB Economists again reiterate their view that the Reserve Bank will cut the official cash rate at its next review on September 10.
The market has underestimated the RBNZ's willingness to cut further, with market pricing implying the easing cycle is over - and that the OCR will increase as early as the start of 2010. This is despite the RBNZ becoming more explicit, expressing its intention to cut the OCR further if wholesale interest rates and the NZ dollar remain elevated at then-current levels (both have subsequently increased). In our view, the NZ dollar is likely to remain strong and we have penciled in two 25 basis point cuts for September and October, although the timing of these are partly dependent on the NZ dollar.
Its weekly report also shows that that wholesale rates have been drifting down. This possibly suggests that some of the home loan rate increases of the past couple of weeks could be unwound.
For instance the five year swap has fallen in a week from 5.44% to 5.39%, which happens to be the same level it was a month ago. Likewise the two-year swap is down seven basis points to 4.07%.
Westpac too acknowledges that interest rates have bottomed and since the Reserve Bank is articulating the OCR will remain low for some time, there is "little pressure for short-term rates to rise any time soon."
It recommends fixing for six months to one year.
"While a strategy of fixing for short terms creates some uncertainty about future cash flows, borrowers can reduce this uncertainty by repaying more than the minimum amount while interest rates are at the lower end of the cycle."
ANZ's Market Focus has two interesting points relating to home loans this week. The first is that very little lending is being done beyond the two year mark. This is unsurprising given the hikes we have seen in the longer maturity rates.
Secondly it has a table of market expectations for the OCR. This shows that the market is backing off, slightly, its view that the Reserve Bank will hike the OCR earlier than what its governor Alan Bollard has been suggesting.
The four reports out yesterday, BNZ's Markets Outlook reiterates what other economists have been saying about rates and also has a useful table showing how swap rates have come back in the past week.
