What’s going on with interest rates?
Ihave to re-fix my mortgage next week — which seems as good a time as any to write about interest rates and where they are heading.
Both the Reserve Bank of New Zealand (RBNZ) and the US Federal Reserve made official cash rate calls last week too — which means we have fresh signals to decode about the likely trend.
The respective messages from the two central banks are now very different.
In the US the official cash rate was raised to 2.25 per cent on Thursday — it was the eighth rate rise since 2015. The signal was very clear: There are more rate rises to come in the near future as the US economy heats up.
In New Zealand we have had the official rate on hold at 1.75 per cent since December 2016.
Both the RBNZ, and most economists, expect it will not rise until last 2020 or early 2021.
Also, in his past few statements RBNZ Governor Adrian Orr has stated: “The direction of our next OCR move could be up or down.”
Which — to cut through the nuance of monetary policy jargon — means the next move might not be up . . . it might be down.
The economy is still trucking along at a steady pace but there are downside risks from falling business confidence and global trade war tensions.
In other words things are much more finely balanced in New Zealand.
US rates have a big bearing on the global economy — they’ll likely strengthen the US dollar, for example, putting downward pressure on the kiwi dollar.
As they rise they also lift the cost of global cost of borrowing and put pressure on highly indebted countries — like Indonesia, Turkey and South Africa.
New Zealand has a lot of debt too but the good news is that we are funding more of it locally from deposits than we did prior to the global financial crisis.
While this is slightly more expensive than relying on short term wholesale rates sourced offshore, it means there is less of an immediate impact when international rates do rise.
So despite rising US rates driving up the cost of borrowing on international markets — local banks aren’t under too much pressure to raise mortgage rates right now.
In fact we’ve seen retail rates fall this year as the Reserve Bank has grown more cautious.
So let’s cut to the chase.
I’ll probably be taking the cheapest rate on offer right now — which means fixing for one year.
Am I sure this is the best choice? No, you never can be. Things happen, conditions change and even highly rational decisions can look regrettable in hindsight.
All you can do is look at all the options and consider them against foreseeable risks and scenarios.
These are good times for borrowers.
None of the choices look terrible compared with 2007 when twoyear fixed rates hit 10 per cent — or 1987 when they hit 20 per cent.
Interest rates remain well below historic averages and look set to stay that way for some time.
The RBNZ is so firmly stuck in neutral that retail banks are comfortable offering some very enticing deals for longer-term periods — 4.39 per cent for three years, 5.09 per cent for five years.
When you lock in for a long period you are taking a bigger bet on the future outlook.
If the economy picks up and rates rise then you may end up saving a significant amount of money.
If it slows down then rates may fall and you’ll probably feel like you are stuck paying too much.
I’ve had the latter happen to me a couple of times since the GFC. It’s been a longer, slower recovery than most predicted and that’s why I prefer to keep fixing short.
Even the Reserve Bank was caught out in 2014 when it hiked the official rate four times to 3.5 per cent before reversing through 2015 and 2016.
If you want to really dig deep into detail then inflation is the key.
Unless it spikes sharply — and it hasn’t for several years — the RBNZ is not under pressure raise rates.
I suspect that things won’t change much in a year — so I’ll get at least one more chance lock in at decent long-term rate if I want to.
Meanwhile I won’t be stuck paying too much for long if the economy does tank and rates are cut.
I guess that makes me a little bearish about the outlook.
If I’m wrong it will be because the economy has outperformed — which isn’t so bad on balance.
Ultimately it’s worth remembering that the losses and gains to be made around your mortgage costs are hypothetical.
It’s probably better to think of your mortgage rate as the price you pay for a certain level of security and/or flexibility — depending on what you prefer.
It is helpful — and interesting — to stay up to speed on the monetary policy trends both here and around the world.
But unless you are trading currencies or active in bond markets it doesn’t pay to obsess or invest too much emotion in a decision which is dependent on factors you cannot control.
The signal was very clear: There are more rate rises to come.