Interest rates expected to ‘start rising’

Mortgage rates are probably as low as they are going to get, economists say.

Rates have hit record lows over the past year as central banks pumped stimulus into their economies to ward off the financial impact of Covid-19.

But ASB’s economists said the improving economy, and rising long-term interest rates around the world, would put pressure on New Zealand rates to rise, particularly for home loans fixed over longer terms.

While the Reserve Bank was likely to want mortgage rates and other borrowing costs to stay low over the year ahead, there was less need for more stimulus via a lower official cash rate, the economists said.

They said, if the economy continued to recover in the way that had been in recent months, it was likely the Reserve Bank would want to begin the process of lifting interest rates next year.

‘‘We don’t think official cash rate increases are on the cards for 2021 but it is possible they could occur later in 2022.

‘‘At times last year, when the economic outlook was particularly dire, it looked like interest rates could fall further and remain low for many years.

‘‘Now, because the economy is tracking better than feared, we think the risk is interest rates start moving higher much sooner than we thought six months ago.’’

Gareth Kiernan, chief forecaster at Infometrics, said that provided economic activity maintained its ‘‘relatively solid bounceback’’, it would be fair to say the Reserve Bank had probably stimulated the economy ‘‘more than enough’’.

‘‘There are concerns about inflation reappearing and the lift in bond rates around the world could start to put upward pressure on longer-term mortgage rates. The vaccine roll-out is boosting optimism about the global economic outlook, so the rationale for any further interest rate cuts looks thin.’’

Westpac chief economist Dominick Stephens said he expected mortgage rates, particularly over longer terms, to start rising within the next couple of months.

Short terms might increase next year. But he said the official cash rate might not rise until 2024.

There was a short-term spike in inflation, he said, and the Reserve Bank would look through that to focus on medium-term inflation.

But its moves to wind back its large-scale asset purchase and funding for lending programmes would be enough to push rates higher, as would the requirement that banks hold more capital against their loans.