Uncertain times ahead for borrowers

Guest Post from Tony Alexander

To say that the track for inflation and therefore interest rates going forward is relatively unclear would be an understatement not just for us in New Zealand but for other economies as well. In the United States we started the year with some good optimism that inflation would be comfortably tamed. But about three months ago that optimism evaporated in face of much stronger-than-expected data on the labour market.

Strong jobs growth implies an increased risk that wage growth will remain at uncomfortable levels for the Federal Reserve. The change in inflation optimism has caused wholesale interest rates in the United States to rise anew and this had fed through into higher medium to long-term interest rates in most other economies as well.

The rises in bank borrowing costs here have prompted banks to raise their fixed mortgage rates another 0.25% or so in the past couple of months despite no new rise in the official cash rate. In fact, apart from last week’s underlying inflation gauges in New Zealand coming in marginally higher than expected, most other data have been telling a story of easing inflation risks.

Inflation expectations have eased along with business pricing plans. Importantly, from the NZIER’s Quarterly Survey of Business Opinion we have seen a distinct easing of pressure in the labour market and a sharp fall in the overall capacity utilisation rate.

The various measures showing easing jobs growth can probably be put to a large extent down to the surge in net immigration to a non-pandemic record 78,000 in the year to May from -20,000 a year earlier.

But a boom in migration is not a one-way street.

I can tell from my monthly survey of residential property investors that landlords are finding it increasingly easy to secure what they consider to be good tenants. There is also new upward pressure on rents appearing. This will have the effect of pushing people towards purchasing property earlier than would otherwise be the case and that would help explain the bottoming of the house price cycle 2-3 months ago and the 20% lift in seasonally adjusted dwelling sales numbers over the June quarter.

In Australia, just a few hours before writing this column, data was released showing annual inflation at a lower level of 6% than had been expected. The market has shifted to pricing only a 30% chance of another rise in their cash rate come August. This better-than-expected situation in Australia has had a mildly depressing impact on wholesale interest rates here, though the biggest offshore influence remains what happens in the United States.

With essentially three economies having to be given thought to when considering where interest rates will go the ability to make predictions one would assign good probability of accuracy to is highly compromised. This however is important information for borrowers.

While most of us economists expect monetary policy here to be eased before the middle of 2024, we could easily be wrong.

That means that for most borrowers there still remains value in splitting one’s fixed interest rate period away from all at one year to some at 18 months and maybe some at two years as well.

As a closing note, usually when Spring arrives, we see banks introduce some special rates, maybe couched in terms of their “Spring Campaign”. Spring is still a month away but already housing activity is picking up, and there will be lending business for banks to secure if they have something good to offer. So, don’t be surprised if special rates or cashback deals appear in a few weeks' time.

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