Lower Lows | CAMERON BAGRIE
Our SMM team is delighted to bring you an informed and independent view of the NZ economic outlook in this post-Covid-19 environment. Cameron Bagrie is a highly respected Economist (and former Chief Economist for ANZ) who is regularly sought for his views by major media sources, often because he's prepared to challenge mainstream thinking. His honest and sometimes contrarian views provide readers with an independent analysis of current trends affecting everyday New Zealanders - with no spin or over-complication. Here's our first Blog brought to you on behalf of Bagrie Economics ...
Key influences on mortgage interest rates are wholesale interest rates (think the Official Cash Rate or OCR today, where it is likely to evolve over the coming years and long-term interest rates), funding costs for banks (think what banks need to pay for money via deposits), and competition.
We have a sick economy so one way to support it is to inject “medicine” in the form of lower interest rates both now, and for an extended period.
The OCR sits just above zero and the Reserve Bank of New Zealand (RBNZ) has committed to keeping it that way for quite a while. The RBNZ is also buying government bonds which is basically another way of making sure longer-term interest rates are low too. Low wholesale rates support low mortgage rates and especially those longer-term ones.
Term deposit rates have also been falling, and with some banks having rates below 2 percent and the entire 1-5-year deposit curve is pretty flat. If banks are paying less for deposits, they can offer a cheaper rate on the other side of the balance sheet to borrowers.
Deposits (money coming into the door) have also been growing faster than credit growth (money going out the door). The RBNZ has also been offering banks cheap funding (money) and relaxed some funding rules so banks can send money out the door at a more competitive rate.
Borrowers have been winning, but at the expense of savers.
The RBNZ was pretty explicit in their latest Monetary Policy Statement in their desire for lower mortgage rates noting, “We expect our recent monetary policy easing to pass [read: we’ve been successful lowering wholesale interest rates] through more fully to bank funding costs and lending rates in the near future, and will be closely monitoring movements in retail interest rates and bank margins.”
Can they continue to fall?
If wholesale interest rates plumb even lower lows (some are saying the OCR should go negative though I’m not a supporter) and the RBNZ provides more cheap money to banks (which they will do), and deposit rates continue to nudge lower (maybe), there is scope of mortgage rates to go down a bit further. More competition for credit, if housing picks up, could accelerate this. Housing lending also tends to be favoured over business lending in difficult times meaning more attractive rates, though that does not mean it is easier to get. All lending is being more closely perused.
The issue is not just about how low mortgage rates go, but how long they can remain low.
With the economic recovery looking precarious, inflation low and unemployment expected to head further north, the economy is going to need remarkably low interest rate “medicine” for an extended period. That is the message across the wholesale and mortgage borrowing curve.
There are various schools of thought on the future path for interest rates beyond the next couple of years, which critically depends on the outlook for the economy and inflation. Some say inflation will appear and interest rates will need to go back up. Others point to the poor economic environment that is more deflationary that inflationary and with low interest rates here to stay.
Both will likely claim victory. It just depends on your time horizon. Inflation is not turning up anytime soon but has the potential to a long way down the track.
While Bagrie Economics uses all reasonable endeavours in producing reports to ensure the information is as accurate as practicable, Bagrie Economics shall not be liable for any loss or damage sustained by any person relying on such work whatever the cause of such loss or damage. The content does not constitute advice.