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Home Loans Today Interest Rate up date February 2015

July 12, 2015 by · Leave a Comment 

Home Loans Today

February 2015 Interest Rate Review

GDP and employment growth rollicked along at over 3% over the summer and Auckland house price inflation accelerated again into the double digits. Median house prices in Manukau and Auckland City were 25% higher in January than a year ago, thanks also to record high net migration and a housing shortage in Auckland estimated at between 15,000 and 20,000 homes. Inflation south of the Bombay Hills remained in the single digits because jobs growth and migration was more subdued and housing supply was not so constrained.

Normally that 3%-plus GDP growth would generate enough inflationary pressure to force the Reserve Bank to put up interest rates to cool things down and keep inflation within its 1-3% target band. Instead, fixed mortgage rates are falling and the Reserve Bank can’t hike the Official Cash Rate (OCR) because prices in New Zealand and around much of the world are falling.

Something appears different or broken in the bowels of the economic machine which means growth doesn’t seem to be creating as much inflation as it used to. Central banks in Europe, Japan and China have responded to this lack of inflation and often outright deflation by cutting interest rates. Those who have already cut their rates to 0% are having to print money to buy bonds in the hope they can drag down longer term interest rates and fire up lending and economic activity. They call it ‘Quantitative Easing.’

The European Central Bank and the Bank of Japan will be the biggest printers this year. So far the money printing has been effective at firing up lending to buy assets such as bonds, stocks and property, but hasn’t driven as much ‘real’ investment in new factories, jobs and new products, especially in Europe and Japan. The printing appears to have worked better in America, although its inflation rate is also still slumping.

New Zealand’s Reserve Bank has estimated 2015 will be the biggest year for central bank Quantitative Easing since 2011. This has driven long term interest rates in Europe in particular to their lowest level since the 1400s. Swiss two year bond yields, for example, now offer a yield of minus 1.2%. That means savers are effectively paying money to banks and Governments to look after their money, which means they’re often keen to lend to high rate countries like New Zealand.

Earlier in February ANZ New Zealand was able to borrow 750 million euros from those same European savers experiencing negative interest rates. It borrowed at a rate of 0.625%. ANZ had to pay a bit more to swap that money back into New Zealand dollars, but would still have had plenty of margin to offer a low fixed mortgage rate. All the big banks are able to borrow cheaply overseas.

That’s the backdrop for our mortgage rates, which have fallen as much as 1% over the last 9 months. As recently as the beginning of January, the average two year mortgage rate was 5.98%. In recent weeks banks have been offering 2 year specials of as low as 5.19%.

Could rates go lower?

The slump in fixed mortgage rates has made it much more difficult to justify paying the 6.74% offered by most banks for floating rate mortgages, if the decision is purely about getting the lowest rate.

The question then for fixers is: how long to fix? The answer depends on your view on where inflation in New Zealand and globally is going, and what you think central banks will do about it.

The jury is in overseas. They are treating this very low inflation and deflation as a cyclical issue that needs to be addressed with even lower interest rates and money printing. So far this year 18 central banks cut interest rates or announced new money printing plans, including China and Australia, which are New Zealand’s two biggest trading partners. The Reserve Bank of New Zealand is an outlier and despite the strong growth is seen unlikely to hike interest rates again for the foreseeable future — at least until well into 2016.

So the global trend over the last six months has been for interest rates to fall ever lower. It’s not just about falling petrol prices. There is now a growing debate about whether the deflation is structural and linked to changing technology, the globalisation of services and ageing populations. For now, central banks think it’s cyclical.

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