The Reserve Bank has come out with a gloomier outlook for the NZ economy and the global economy. In the short term that means the potential for lower mortgage rates has increased.
Wholesale rates that banks use for funding are now the lowest I’ve ever seen. Check out this graph today of the 5 year fixed wholesale rate. It dropped another 0.20% to 1.72%. Its previous low was in 2016 when it hit 2.06%.
Based on wholesale interest rates today, short term rates could drop another 0.25% and it’s conceivable that we could see longer term fixed rates fall below 4.00%. Kiwibank (who we broker for) has dropped their 5 year rate to 4.29%.
Most banks now have 1 and 2 year rates at 3.99% and I’d expect to see 3 year rates there shortly as well.
This will play out over the next few weeks and rates are likely to stay low for a while as I cannot see the Reserve Bank revising its forecast. That means lower rates, for longer.
Offsetting this medium term, the Reserve Bank is putting banks under pressure to increase capital and that will put mortgage rates under upward pressure. Hence, if we get longer-term rates below 3.99% then to me these are very, very attractive in the context of increasing cost pressure on banks.
The negative to this otherwise positive news is that we don’t really want falling rates. It’s a sign that global growth is stalling and that central banks around the world are struggling with the deflationary forces we’ve blogged about for past 3-4 years, let alone growing geo-political risks.
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