Swap rates have risen by almost 1% over the past six months and mortgage rates have gone nowhere near that.
Koura Wealth founder Rupert Carlyon says that means banks are wearing lower margins, which they do not like to do for long.
He says there could be some hefty rate rises for mortgages even absent OCR increases.
However, Kiwibank chief economist Jarrod Kerr says wholesale market pricing doesn’t dictate that the RBNZ will need to hike the OCR this year.
He says wholesale rates are getting ahead of themselves, again. Short-end rates are sitting well above the RBNZ’s 2.25% OCR, with the front of the curve implying a degree of tightening that doesn’t sit comfortably with economic reality.
In theory the overnight index swap market (OIS) is the cleanest read on where markets think the OCR is heading. Kerr says in practice, in New Zealand it is anything but.
“These wholesale rates are the financial market instrument of choice for banks to hedge against changes in the RBNZ’s rates. But OIS pricing is constrained by thin liquidity and structural frictions. The market is small and concentrated
“A handful of local banks dominate pricing, and outside of key event dates there isn’t a lot of genuine two-way flow. On top of that, there are the usual technicals. Bank balance sheets, mortgage hedging and regulatory settings all shape flows.
“Demand destruction, a weak labour market, weakening business appetite for risk are putting simultaneous downward pressure on growth and inflation.
Add to that the oil shock and you have an economy wearing concrete shoes.
“Short term inflation, off the back of an international oil shock, is not something interest rates can fix. Especially when demand destruction is the result,” he says.
“An economy threatening to flatline while fuel prices are elevated will need resuscitation, not further dampening.”
Kerr says hiking the OCR early will only kick the economy while it’s down.”
Squirrel chief executive David Cunningham says the obvious path for mortgage rates is higher.
“Unfortunately, the wholesale mortgage rate curve is significantly higher than where it was six months ago.”
When two-year fixed rates were about 4.5% the swap rate was 2.6%. At a 3.5% swap rate that implies a 5.4% two-year rate. Most banks are about 5.2% or 5.3% now, meaning a little upside.
He says as term investment and savings accounts are not up much that may contain fixed lending at about their existing levels and settle there for now.
Cotality chief property economist Kelvin Davidson says it’s an open question about whether the RBNZ pushes through the first OCR rise in July or September, but either way, there’s still scope for mortgage rates to rise further. This will also be a limiting factor for the housing market.
Unsurprisingly, borrowers have already started to fix longer, with more than 50% of new loans lately being fixed for more than 12 months, up sharply from about 20% over September-November last year. Within that, the two-year rate is more popular than it’s been since late 2022/early 2023.
“It’s obviously difficult to make predictions about where interest rates in general might end up, and which individual mortgage loan term might be the best choice. That being said, it’s worth keeping in mind that most commentators currently envisage a reasonably short and sharp OCR tightening cycle, perhaps largely being done/paused early next year, with the rate sitting in the 3-3.5% ‘neutral’ range. Some mortgage rates below 6% should still be possible,” he says.
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