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Current Interest Rates

Indicative rates current at 13 May 2019

Floating 5.69
Fixed 6 months 3.99
Fixed 1 year 3.89
Fixed 2 years 3.95
Fixed 3 years 3.95
Fixed 4 years 4.35
Fixed 5 years 4.45
Revolving Credit 5.65

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“Rate Cuts Are Coming ” – Market Commentary April 2019
This Commentary has been brought to you by one of New Zealand’s Top Financial Journalists, Bernard Hickey:

The Reserve Bank has changed its stance on interest rates and is now widely expected to cut the Official Cash Rate at least once or even twice this year, starting as soon as May 8.

Governor Adrian Orr changed the bank’s view on future interest rates from neutral to an easing bias last week, surprising some who had expected him to say again that the next move could be either up or down. Instead, he said global economic headwinds and poor business confidence meant the next move was more likely to be down.

Financial markets pushed wholesale interest rates lower and by this week were expecting a more than 50 percent chance of a 25 basis point cut next month, and one more later in 2019. That would drag the Official Cash Rate to 1.25 percent. Cuts are also now expected in Australia, where the housing market there is in free-fall and dragging on consumer spending.

Two things are going on in the Reserve Bank’s thinking. Firstly, slower economic growth in China, Europe and the United States has taken some wind out of the sails of the global economy. Two weak business confidence surveys here in early April have also added to the economic headwinds.

Secondly, the Reserve Bank’s mandate and the way it makes interest rate decisions changed from April 1. Previously it only had to worry about keeping inflation within a one to three percent range, with a focus on two percent. Now it must also ‘contribute to supporting maximum sustainable employment’. That is vague, but still meaningful when Statistics New Zealand says 351,000 people were either unemployed or under-employed.

Interest rate decisions are also now being made by a seven-person committee that includes three outsiders, one of whom is an economist who worked for the biggest union. Previously, the Reserve Bank Governor was the sole decision maker.

Orr gave a speech last week that explained how the new mandate and committee would work and I went along. He downplayed suggestions the committee would have a radically different view, saying it had the same economy and the same tools as he had when he made the last ‘sole decision maker’ decision last week.

But the change of tone from the previous decision on February 13 was obvious. I doubt the committee structure or the new mandate has changed the view much. The more important changes are in personnel.

Orr himself is more dovish than his predecessor, Graeme Wheeler, but the departure after the February 13 decision of Chief Economist John McDermott is a bigger factor. McDermott was the forecasting engine behind Wheeler’s mistaken interest rate hikes in 2014 and presided over a forecasting department that consistently saw inflation and capacity pressures that did not eventuate.

Banks have already moved to 3.99 percent as their main point for mortgage competition. It seems extraordinary to say it, but we could see mortgage rates below 3.5 percent by the end of the year, despite it being the 10th year of an economic expansion with unemployment near four percent.

The advent of the smartphone in 2007 and its rapid rollout globally has helped drag on wages and prices as new suppliers and business models challenge previously closed markets. The increasing use of contractors and the rise of the ‘gig’ economy is also helping contain inflationary pressures in otherwise solidly growing economies with apparently low unemployment.

But there could be a spanner in the works of ever-lower mortgage rates. The Reserve Bank is consulting on whether to double capital requirements for the big four Australian-owned banks, which would put them on a level playing field with the smaller local banks such as Kiwibank, TSB, SBS and Heartland.

If confirmed next month, that may force the big four to increase their profit margins by not passing on lower wholesale mortgage rates into retail rates. The caveat to that view is they will not want to lose market share to the local competitors, who won’t have to increase their capital levels. So the jury is out on whether a lower OCR will drag mortgage rates down too.

The Reserve Bank remains determined to increase capital levels to reduce the risk of a bank going bust and argues that the effects of higher bank margins on the economy more broadly are minimal and will come out in the wash. The jury is out on that too.

The housing market outside of Auckland is still cantering along though, with double digit inflation in some regional towns and cities. Auckland remains subdued because of tougher loan to value restrictions and a foreign buyer ban, but is not seeing an Australian style collapse because migration remains near record highs and there is still a housing shortage of close to 50,000.

House building is in theory surging along at record highs, but a closer look reveals it is not making a dent in the shortage of homes created over the last two decades of under-building. KiwiBuild has gotten off to a slow start and the basic issues remain unresolved with local infrastructure financing. Councils don’t want to pay for the new roads, buses and parks needed to allow new sub-divisions.

Also, the prices are too high for most first home buyers and councils in growth cities such as Auckland, Hamilton, Tauranga and Queenstown remain unable or unwilling to build the necessary infrastructure to support a massive and fast increase in housing supply. Until the central Government stumps up with tens of billions of dollars for new roads, railways, pipes, schools, hospitals and playing fields, the shortage of homes will keep a strong floor under house prices.

Key things to know:

• House price inflation was broadly flat in March in the biggest cities. Prices in Auckland were down 1.5 percent from a year ago, while Christchurch prices were up 0.6 percent. Wellington prices were up 8.4 percent, while prices in Hamilton and Tauranga were up around four percent.

• The Reserve Bank says interest rates are more likely to fall than rise through 2019 and 2020. A full set of fresh forecasts are due on May 8 and financial markets see a greater than 50 percent chance of a cut.

• Banks have dragged their best fixed mortgage rates down to 3.99 percent and could drop them to 3.5 percent this year if capital controls aren’t too tough.

• The key variables to watch in 2019 are Adrian Orr’s dovish views, global interest rates, Europe’s political and economic dramas, the Chinese economy and Donald Trump’s twitter account, in that order.

By Bernard Hickey

(Market Commentary sourced from NZFSG Adviser Services, 5 April 2019)

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