Source: Radio New Zealand
Economists were split on whether the conflict in the Middle East would mean lower or higher interest rates. Stuff/Kathryn George
Banks are moving interest rates higher, but the right term to pick depends a lot on how you think the economy will fare through the rest of this year.
BNZ on Wednesday increased its 18-month rate by five basis points, to 4.69 percent. Its two-year rate lifted by 20 to 4.89 percent, its three-year rate by 30 to 5.29 percent, its four-year rate by 30 to 5.49 percent and the five-year rate to 5.69 percent.
A day earlier, Westpac said it was increasing its rates, too. The one-year rate lifted by 10 basis points to 4.59 percent, and the two-year and three-year rates by 30 basis points to 5.19 percent and 5.29 percent, respectively.
It comes on the back of rising wholesale interest rates, which drive what it costs banks to borrow the money they lend.
The two-year rate has lifted from about 2.6 percent at the end of February to more than 2.8 percent.
Squirrel chief executive David Cunningham said although economists were split on whether the conflict in the Middle East would mean lower interest rates because of the impact on the economy, or higher interest rates because of the impact on prices, the markets were pricing in hikes.
“Ultimately, what the market prices is what flows through to the mortgage rates. We’ve really seen the pass-through of much higher swap rates, and so the banks naturally protect their margins and lift mortgage rates.”
He said other banks were likely to follow.
“The lowest point on the curve now is the six-month rate… if you take the six-month rate, it’s much lower right now, but you’re betting on interest rates not increasing, you’re almost betting against the market and taking the risk that they won’t be as high as the market’s pricing.”
Six month rates are available from about 4.49 percent, although some of the main banks are also offering one-year rates at that level, too.
Cunningham said if people thought markets had got ahead of themselves, it could be worth taking a shorter fix. “I’d probably go with six months on the basis that it feels to me like the market’s gone all gloom, and if anything, we’re going to unquestionably have a weaker economy because of the Middle East conflict.
“When it finishes, the oil price comes back down to the same level.
“Eventually, the world has a habit of sorting itself out, then the inflationary threats sort of disappear.”
He said people would need to consider their own circumstances and how they could cope with an increase, if interest rates did move higher.
But Infometrics chief forecaster Gareth Kiernan said there was “so much risk to the upside on lots of bad stuff at the moment”.
“Even though the two-year is a bit higher… in a world of uncertainty, paying a bit more in the short term to lock in at 5 percent-ish for two years is probably not a bad thing in my view.”
He said anyone who fixed for six months could be underestimating the chance of interest rates rising later this year.
“Financial markets would tend to back me up on that in terms of what swap rates and longer-term rates have done over the last few weeks.”
He said he expected a lift in the official cash rate in September.
“I guess the difficulty for the Reserve Bank is they’re trying to weigh up the negative effects on growth from higher fuel prices versus the effects of higher fuel prices on inflation more generally.
“We still have the view that businesses are more in a mindset to pass that kind of thing on than they were a decade ago… the Reserve Bank probably has to push back against that more than might otherwise be the case.”
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand
