Rates may have hit their low

Retail interest rates may be as low as they are going to go.

The Reserve Bank kept the official cash rate on hold at 1 per cent on Wednesday, surprising the market which had been expecting a cut.

While banks did not move their retail rates immediately, wholesale markets responded swiftly.

Banks borrow on the wholesale market to make up the difference between what savers deposit with them and what lenders require.

ASB chief economist Nick Tuffley said the two-year swap rate was 1.23 per cent after the announcement on Wednesday, and it was 1.25 per cent before the Reserve Bank cut the official cash rate from 1.5 per cent in August. ‘‘From a low of 0.82 per cent, the two-year rate – and the entire interest rate curve – have ground higher as global optimism around trade tensions and Brexit has improved. But around half of that rates rebound has occurred in response to the Reserve Bank’s official cash rate decision.’’

Tuffley said there was a risk mortgage rates would start to lift and fuel fear of missing out among mortgageholders as the seasonal increase in activity hit the property market.

‘‘Crucially, a lot of mortgage rate refixing will be happening in coming months. The associated balance sheet risk management of that refixing will in itself put upward pressure on wholesale swap rates, compounding the recent wholesale market pressures. Keeping the OCR on hold is not without its risks.’’

Infometrics economist Gareth Kiernan said pressure could go on fixed home loan rates. ‘‘Keep an eye on house sales volumes due out from the Real Estate Institute – if they are weak, then the banks might try to keep mortgage rates down to attract customers in a soft market, but any upward momentum in sales could ease that pressure to chase market share and see them focus on regaining any margins that have been lost as a result of the lift in wholesale rates.

‘‘The other factors to bear in mind are the Reserve Bank’s next financial stability report, due on November 27, and the final decision on the capital review, due on December 5.

‘‘The former is probably less directly relevant for interest rates in the near term but we expect the bank to further ease its loan-to-value restrictions which could stimulate buyer demand and add to the signs of improving momentum we have seen in house prices over recent months.

‘‘More important is the capital review which, if implemented as proposed, could significantly increase the margin that banks seek on their lending. If I was a bank looking at my mortgage pricing, I would probably wait to see what the Reserve Bank settles on early next month, and then be able to use the increased capital requirements as an easy – and mostly valid – scapegoat for having to put up mortgage or other lending rates.’’

Economist Cameron Bagrie said the increase in wholesale rates would make it hard for banks to sustain twoyear rates as low as they currently are.