ANALYSIS: For a while there things were looking good on the mortgage interest rates front. Optimism about falling inflation and easing monetary policy in the United States had caused some big falls in medium to long-term fixed rate borrowing costs around the world including here in New Zealand.
For instance, the cost to a New Zealand bank of borrowing in the wholesale markets at a fixed rate for two years fell from 5.6% at the end of October to 4.7% a month ago. As a result bank lending margins increased substantially, and we started to see some small cuts to lending rates of about 0.15%.
This was fairly miserly probably because our central bank would have been talking behind closed doors to the bankers telling them it would not be helpful to undermine still tight monetary policy by passing on this good news impact from the US market. Ample justification for this unseen pressuring by the Reserve Bank unfortunately hit us all last week and the outlook for interest rates is now not so good.
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A central way by which tight monetary policy lowers inflation is via a worsening of the labour market. As people worry about their income, they cut back their spending and businesses lose their ability to easily pass on cost increases. But last week we learnt that rather than rising to 4.2% as the Reserve Bank had expected the unemployment rate only rose to 4% in the December quarter. Moreover, rather than growing just 0.2% in the quarter job numbers grew 0.4%.
In addition, central bankers in the United States have been warning investors not to be so optimistic about monetary policy easing there. The impact here has been a jump in bank borrowing costs, with the two-year wholesale bank borrowing costs is now around 5.2%.
Is this rise and similar increases for other terms enough to cause a round of increases in bank fixed mortgage rates? Thankfully no. Because banks never got the chance to pass on borrowing cost reductions from November to January, they have fat in the system able to absorb the recent rise in rates.
Tony Alexander: "For the first half of this year interest rates pressure on the NZ economy will remain firm." Photo / Fiona Goodall
This point is probably worth remembering because the financial markets are now pricing in one more increase in the official cash rate, either on February 28, April 10, or May 22. If the Reserve Bank does raise the rate from 5.5% to 5.75% – and it probably won’t have to – then media commentary will be fairly shattering, and many people are likely to feel quite fearful of the damage which may come.
I’m optimistic that we will receive just enough information showing some easing in inflationary forces to avoid a final rate rise for this cycle. It pays to note for instance that the Household Labour Force Survey from which the unemployment and jobs growth numbers referred to above are derived has a history of rogue results. The results in fact are at odds with other employment indicators which show greater weakness.
But the main thing to take away from the data is that for the first half of this year interest rates pressure on the NZ economy will remain firm and this will act to constrain not just our pace of economic growth through crunching retailers, but the initial speed of upturn in the housing market.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
