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  • A shift to floating rates

    A shift to floating rates

    By PHILIP MACALISTER Last updated 11:02 11/09/2009

    OPINION: I can almost hear all those people sitting on floating or short-term mortgage rates breathing a sigh of relief after yesterday’s official cash rate (OCR) announcement.
    The governor of the Reserve Bank, Alan Bollard, decided to leave the OCR unchanged at 2.50 percent and more importantly he reiterated his line - the line the markets don't believe - that OCR increases are not likely until the end of next year.
    Yes that is sweet comfort in the short term, but the medium to long term looks increasingly unpleasant.
    Two comments Bollard made yesterday are well worth noting. One is that he has removed the possibility of further rate cuts. As readers will recall, he said in his previous statement rates could be cut further.
    If you had that in your planning take it out now - it isn't going to happen.
    The second comment he made is don't assume these interest rates will stay at these levels forever.
    When they rise they will rise quickly and steeply.
    Also, one of the economists had this to say: "Once the bank is convinced the time is ripe, sizeable interest rate movements can be expected."
    The view developing is that once the central bank starts tightening, it will endeavour to get the cash rate back up to "neutral" as soon as possible.
    Accordingly, the Bank's 90-day bank bill rate track goes from 2.90 percent in December 2010 to 5 percent by March 2012.
    While this increase may seem scary, when it happens neutral is somewhere around historical averages, not up around 9 percent or 10 percent.
    What does this mean for borrowers? The key point is that you will need to consider your strategy over the medium to long term and decide how you will manage your interest rates and cost.
    Right now this is an opportune time to be using some of the savings from reduced interest payments to reduce your principal. But I suspect not many people are actually doing that.
    One thing you must be aware of is being enticed into sweetheart floating rates. Over the years (although not recently) we have seen lenders offering sweetheart "introductory" deals for shorter duration terms.
    There is talk that these sorts of lending products will come back into the market.
    Like all good things these terms don't last forever and at some stage you will probably have to roll onto what I call more standard rates.
    One thing I think will happen is that there will be a bit of a campaign amongst banks to get your business as we move into spring. However, it won't be any of these deals where you can win a house or overseas travel or the like.
    It will be around rate and shorter-term rates will come down. In the past week ASB has put out an historically low floating rate of 5.75 percent and TSB Bank dropped its six-month fixed home loan rate from 5.50 percent to 5.35 percent.
    That makes it the lowest rate for this term, just pipping HSBC and Westpac which both sit at 5.39 percent. The median big bank six month rate is 5.48 percent.
    There will be a battle for business, but not all lenders are likely to play the game. More importantly the battle will shift away from medium fixed term rates (two years being the recent competitive zone) to floating and short-term rates.
    Bollard will like that, as it will make the OCR a more effective tool in managing interest rates.
    Philip Macalister is the publisher of www.mortgagerates.co.nzhttp://www.stuff.co.nz/business/pers...floating-rates
    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx

  • #2
    The difficulty I have with a lot of these arguments is that they are so contradictory. Many commentators are calling this a false start and predicting a W shaped trend yet they are often the ones who are heralding to all that short term interest rates are about to hit the roof.

    The governor of the Reserve Bank, Alan Bollard, decided to leave the OCR unchanged at 2.50 percent and more importantly he reiterated his line - the line the markets don't believe - that OCR increases are not likely until the end of next year. Yes that is sweet comfort in the short term, but the medium to long term looks increasingly unpleasant.
    Two comments Bollard made yesterday are well worth noting. One is that he has removed the possibility of further rate cuts. As readers will recall, he said in his previous statement rates could be cut further.
    If you had that in your planning take it out now - it isn't going to happen.
    The second comment he made is don't assume these interest rates will stay at these levels forever.
    So, this commentator is stating that in the medium term rates are likely to rise. Also somehow he has interpreted that:

    When they rise they will rise quickly and steeply.
    How did he arrive at that conclusion? Perhaps this is from:

    Also, one of the economists had this to say: "Once the bank is convinced the time is ripe, sizeable interest rate movements can be expected."
    Does anyone know who this 'economist' is?

    The RBNZ has a different opinion - from the Sep Monetary Policy Statement Mr Bollard states:

    There is more evidence that the decline in economic activity is coming to an end, and that a patchy recovery is
    underway.
    However, the medium-term growth outlook remains weak.
    So the RBNZ cannot see us all driving Porsches in the Medium term.

    Therefore, from a completely rational POV how can anyone foresee Bollard dramatically increasing the OCR when he is the first to admit that there is a patchy recovery in place. Even more-so our medium term growth outlook is weak.

    Surely, even when the recovery is more definite, he would be a fool to smother it by upping the OCR too rapidly. RBA are maybe close to easing up their cash rate (which would give AB some breathing room) however, our friends across the ditch have better reason to do so than ourselves.

    So my question is this - what is it going to be?

    Slow steady economic recovery with gradual OCR increases as able to be made wthout stifling growth or rampant inflation (drivers being oil and housing mostly) large short term house price gains and a Reserve Bank using large OCR corrections to reign it all in again?

    Either of these make sense to me - however what many commentators are predicting (weak growth and subsequent, rapid OCR increases) does not.

    Dandan - great to see you back mate. You may be glad to know I haven't resorted to giving up the wine for home brew just yet.

    Comment


    • #3
      Originally posted by watchful View Post
      You may be glad to know I haven't resorted to giving up the wine for home brew just yet.
      Cool, yeah that's right, you're supposed to wining and dining at the moment:-), things now in the property world certainly don't seem as bad as many of the experts were predicting last year, I'm gald I didn't sell anything.

      Comment


      • #4
        2017 is the year according to Barfoots.

        Comment


        • #5
          Rather than a shift to floating rates I've been seeing a flock to short term fixed- 6M at 5.4%-ish and 18MY rates around 6% are getting snapped up. I have not seen many picking the meteoric rise in rates as nobody is fixing for 5Y at 8%.

          Comment


          • #6
            With the NZ$ so high, and the prospect of high oil prices rearing its head again as soon as any recovery gets underway it is difficult to imagine a rapid recovery. I'm with Bollard on the lower for longer. Watchful is right about the contradictions, but I think that is the nature of the beast. The cat has bounced but will it land on its paws or will it hit the bottom again with another thud?
            It's been an interesting time for sure Dandan, and those of us who have kept our nerve and held on will undoubtedly benefit long term. Reactionary selling at the first sign of trouble is for people who dont have a real game plan.

            Comment

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