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ANZ sees more potency for Bollard’s monetary policy as borrowers go short
November 2nd, 2009
ANZ National economists said the Reserve Bank of New Zealand (RBNZ) will gain more immediate control over consumer spending and the housing market when it starts to raise the Official Cash Rate off its record low of 2.5% next year.
With a “large bulk” of household mortgages to be rolled over in the next five months, the economists argue the proportion of borrowers with floating or short-term fixed rates will rise, as longer term fixed rates have risen above their decade averages.
“The mortgage curve continues to steepen, encouraging more people into the shorter part of the curve,” the economists said. “With a large bulk of household mortgages up for re-pricing over the coming five months, the proportion on floating or short-term fixed rates will rise. This gives monetary policy a lot of traction when the tightening cycle eventually starts.”
The Official Cash Rate has a much more immediate effect on variable and short-term interest rates than it does on longer-term rates. Currently, 23% of mortgages are on floating rates, with a further 38% fixed for one-year or less, they said. “This compares to 15% and 25% respectively in February 2007, just before the last tightening cycle.”
These figures contrast hugely with Australia, where over 90% of mortgages are on variable rates. This has meant the Reserve Bank of Australia had much more control over the Australian economy than the RBNZ did in New Zealand when the global financial crisis struck in the latter part of 2008.
It may be one reason the RBNZ is comfortable reiterating its expectation that it will keep the OCR at 2.5% until the second half of 2010 as it gains more short-term control over spending and interest rates.
Here are the full comments from the ANZ National Economists:
The mortgage curve continues to steepen, encouraging more people into the shorter part of the curve. With a large bulk of household mortgages up for re-pricing over the coming five months, the proportion on floating or short-term fixed rates will rise. This gives monetary policy a lot of traction when the tightening cycle eventually starts.
Despite the OCR at record lows, the effective mortgage rate faced by households is still higher than previous troughs. In September, the effective mortgage rate (EMR) fell to 7.05 percent from 7.15 percent in the previous month, still above the 6.9 percent bottom at the end of 2004. However, the lagged impact of the RBNZ’s aggressive easing is still flowing through, and we do expect the EMR to continue falling towards 6.5 percent, as those rolling off fixed rate mortgages refinance at lower rates.
Given the shape of the mortgage curve, more people will opt for the shorter end of the curve. At present, new fixed mortgage rates of 3-year duration or longer are at levels above their decade average, and are therefore “expensive”. The 2-year rate is not that much lower than its decade average (around 60bps below). Furthermore, the steepness of the curve, as measured by the difference between the 5-year rate and the floating rate, is the biggest it has ever been at 290bps.
Based on our internal data, a quarter of the total fixed rate household mortgages are coming up for re-pricing over the next five months (November 2009 to March 2010). If this were representative of the nationwide total, then some $30 billion worth of mortgages are due to be rolled by March 2010. The weighted average rate of those mortgages is 7.5 percent. For those people, there is not much saving to be had from fixing at 2-years, but reasonable savings are on offer at shorter durations.
Hence, we can expect a greater proportion of mortgages to be on floating or shorter term fixed rates over the coming months. Currently, 23 percent of all mortgages are floating, and some 38 percent are fixed for 1-year or less (compared to 15 percent and 25 percent respectively in February 2007, just before the last tightening cycle). These percentages are set to increase further, which will give monetary policy more potency. With the mortgage curve expected to stay upward sloping (though it will flatten once the RBNZ starts to hike rates), there is no where for mortgage holders to run, unlike in the previous tightening cycle. Based on our forecasts of the OCR rising from September towards 5.5 percent by Q3 2011, the EMR will rise towards 8 percent. It is not just the level, but the speed at which the EMR changes that will have the greatest impact.
Implications
The lags in the monetary policy transmission mechanism are becoming shorter given the shape of the yield curve and with a growing proportion of mortgages on floating or shorter fixed rates. Monetary policy is set to have more potency. This is one reason the RBNZ will have confidence in keeping rates low for a while, to give the economy more time to recover. And it is also why we believe the neutral OCR rate is now closer to 5 percent than 6 percent (regulatory changes to the way banks fund themselves also play a part). The effective mortgage rate is set to fall further, and those who are re-pricing soon will continue to benefit from interest savings. But once the tightening cycle starts, the impact on consumer spending and on the housing market will be more immediate.
Tags: ANZ, fixed, Interest Rates, monetary policy, Mortgage rates, OCR, Official Cash Rate, RBNZ, Reserve Bank of Australia, Reserve Bank of New Zealand, variable
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November 2nd, 2009 at 5:27 pm
Meanwhile, the NZ taxpayer carries a significant additional cost:
Alert: 02/11/09 at: http://www.omo.co.nz/
And quess who gets to benefit from the higher yields.
November 2nd, 2009 at 9:06 pm
OK, I think what he is saying is that the govt has to borrow long at higher interest rates because it cannot get money short term at OCR. So its starting to cost to get Bill English’s 40 billion. So in reality rates are up.
November 2nd, 2009 at 9:30 pm
C’mon – Bollard is not going to raise the OCR and people are safe keeping their mortgages in a low floating rate while paying off principal rapidly.
Floating will be below fixed for several years.
November 2nd, 2009 at 9:51 pm
My two cents worth, 80% of mortgages in NZ are of fixed interest, banks know when large numbers are due to be rolled over thus, being slaveminded mongrels, act to cut of any large group from benefitting from current circumstances, thus putting up longterm fixed rates before the fact. Take into account that keeping the floating rates lower than fixed at this point will entice folks back to floating mortgages right before most financially literate people know their is going to be a hiking of interest rates in the very near future to head off the hyper inflation that is coming our way from all the created credit/money computer entries that the privately owned international central banking network have been making.
Just another dose of what the financial sector stalworts call “strangles” or Straddles” for my reckoning, its going to hurt no matter which way you run and only profit the private bankers.
The carburettor needs retuning folks, the way credit/money enters circulation, or you can play around all you want after the carby but, if it remains out of tune, the societal motor will continue to run like a lemon.
November 2nd, 2009 at 11:14 pm
If rates are likely to go lower then the banks will be encouraging people to fix at higher rates, when the rates go past the fixes the banks will be encouraging people to float. Whatever happens they are going to suck your money and encourage as many people as possible to break loan agreements, pay fees and be poorer.
But the banks are still margin banks – hence the need to generate money via fees when margins are low.
November 2nd, 2009 at 11:52 pm
Look – interest rates are gonna drop – this is why there is a housing surge. The people have spoken and they see low interest rates ahead for years.
Most coming off fixed soon will float and floating will be well below 6% for many years so why would you fix at a higher rate? A low floater is a great chance to pay off principal.
Once the second dip of the recession hits, after the stimulus is withdrawn, interest rates will plummet. Floating mortgages maybe 4% or less and then the fixed rates will have to come down or nobody will be tempted to lock in.
“No chance of interest rates rising for 5,6 or 7 years” – from a panel interview on CNBC tonight. The rally in the USA is over. Interest rates are about to head down and stay down.
November 3rd, 2009 at 12:16 am
Plenty of people are telling me that CNBC is not a reliable source of information. In the states today, unless your home loan goes thru F and F it is very unlikely to happen. Some credit card rates are at 30%. To some real degree real people investors have to finance the longer term lending because the system has no peoples bank to do if for them. Yes if you have cash you can get almost no interest but for example top banks in Europe are pleased to borrow a billion from groups of investors at around 9% interest for capital requirements. A floating rate 30 year mortgage means some joker has to provide you with the money for 30 years and cannot get it back unless some other joker is there to buy it from them. We are here today because of the number of jokers who were buying.
What about all of the bankrupt states that want to borrow money? what is their loan cost? Will they get easy money? We are here today because of easy money. The tax payers seem to be the source of easy money and apparently they are already up to their eyeballs in indebtness for the next 30 years or so?
recessions are horrible surely because for ordinary people costs go up rather than down? when stimulus is withdrawn then rates must surely go higher? There are no peoples banks lending money into the worlds economies it is just private banking expecting to be paid back. No stimulus means they expect and demand to be paid back and will not lend.
November 3rd, 2009 at 8:17 am
OK so Andrew when CNBC are interviewing Buffett, Roubini, Taleb, Schiller or Schiff you would ignore their comments simply because they are saying it on CNBC?
I would value the opinions of those 5 over any offered on here.
November 3rd, 2009 at 8:17 am
@The Bank Manager
Where are interest rates going to plummet to? They are at 2.5% and we’re considered high compared to other countries. Granted that rate isn’t flowing through to ordinary people via mortgages or credit cards but frankly where will the credit come from to drop those rates in an attempt to give us a boost? The reserve bank holds rates but mortgage rates carry on going up.
To be honest i’m happy to have 2.5 years to run on a fixed rate of 6% because I’m not having to stress about whether the rates will suddenly shoot like they did in the 90s in England. I’ve kept my payments high but fixed the rate and any extra cash I can save up to pay off when I next float, best of both worlds to me.
November 3rd, 2009 at 8:59 am
“regulatory changes to the way banks fund themselves also play a part”
It would seem so:
http://www.stuff.co.nz/dominion-post/business/3012823/Banks-fight-for-deposits-ridiculous
“But banks in New Zealand seem to be intent on pricing themselves out of business. Deposit rates have been ridiculous in terms of competitiveness.”
Ms Fagg said the unsustainable competition for retail deposits posed “a real conundrum” given the emphasis on customer deposits in the Reserve Bank’s liquidity policy.
…and RBNZ gets some immediacy back into the OCR.
However, I have a question that some of you might be able to help me with please, that is, given “the emphasis on customer deposits in the Reserve Bank’s liquidity policy.” driving rates higher, does that mean RBNZ also gets (can get) a double-whammy effect with inflation control as buying pressure is thereby maintained for NZD resulting in higher NZD?
November 3rd, 2009 at 9:02 am
I thik what the OMO site is telling us is that although Bollard has set the OCR low the Govt cannot get money at that rate, so is borrowing longer term and paying 5.2%. It would be cheaper for all of us taxpayers if Bollard lifted the OCR to 3.5 and the govt could get money at that rather than %5.2. He must have other priorities that override saving taxpayers from paying higher interest costs for govt debt.
November 3rd, 2009 at 9:10 am
My guess, Les, is that by mandating an increased reliance on domestic deposits, the RBNZ hopes to lower the need for offshore funding, thereby reducing the volume of conversion of, and purchase of, NZ$ by the offshore markets. It is not inconceivable that at some stage soon we could have a nominal arbitrage bewteen short term deposit rates ( being higher than) and the variable term mortgage product. Hence I do not think the ‘double’ whammy’ is part of the objective, if by that you fear a further driver to a rise in the exchange rate.
November 3rd, 2009 at 9:16 am
bollard is not being penny wise and pound foolish – he is losing funds now to gain traction further down the path – you only really need your wallet when you go shopping…
November 3rd, 2009 at 10:05 am
>>OK so Andrew when CNBC are interviewing Buffett, Roubini, Taleb, Schiller or Schiff you would ignore their comments simply because they are saying it on CNBC?
Roubini is moving into the recovery camp. Schiff has been going on about dollar collapse and rising rates for so long now that i assume CNBC or yourself quote him out of context to everything he has said before.
>>I would value the opinions of those 5 over any offered on here.
maybe you are just confused?
November 3rd, 2009 at 11:21 am
@The BM: Im not so sure the floating rates will stay below 6% myself or even drop….NZ has to borrow money and its getting more expensive…so yes the OCR may well drop or at least stay <3% but "real" rates are now set elsewhere….so I suspect 6~7% is more realistic, but certainly lower than fixed…If it gets "bad" could we see 4%? dunno…logically yes, but there seem to be so many factors at work that what should happen may not. Personally I agree with you…Im staying floating and paying it down…and since fixed are above average trend I assume many will join us over the coming months as their terms end…
@Andrew: Actually I think we have some real competition in rates, so any bank that tries to get ppl to fix will be so out of sync with the others that they will lose out.
November 3rd, 2009 at 11:26 am
@Andrew and @The BM: I think the presenters and many of the talking heads on CNBC are a joke, but I look at it when quality ppl speak, as per 5 mentioned.
November 3rd, 2009 at 11:36 am
@clare: I dont think rates will drop much if any, if you have a fixed at 6% well that’s a good deal IMHO..its the safe option, you might save a wee bit on floating but it could cost more in 6months…to be honest I dont think anyone knows…..
1a) If this rally all holds together then rates are going and will stay higher to fight inflation…(1a and 1b are Wally’s scenarios) 10% is quite possible, even 11 or 12%.
1b) Hyper-inflation, 20% odd rates….but that be a nose dive to 3)
2a) If (and Im mostly in this camp) we get stagflation than the rates could stay down for years, but not drop, probably raise a bit say 7~8%.
2b) We see a second recession….rates may drop a little 5~7%…
3) A Depression and a maybe a big one…so 0.25% OCR? dunno 1.5% anyway and for years, rates I suspect would be 5% or lower…
Its all nasty IMHO.
November 4th, 2009 at 10:26 am
Harriet – thanks for your response to my question yesterday. Having talked and thought a it through a little more, with some basic demand/supply logic, it seems there would be no increasing effect on NZD, even with offshore depositors getting same i.rates as onshore deposits. Anyway while this welcome rejuvenation of monetary policy hasn’t shot the bird in the foot, it still hasn’t done much to stop it fluttering and flying about more than exporters would like! (Still a problem to be solved, and it could be…just needs the will and breaking free from ‘The Cult’ – neo.lib’ism!)
Just to add to the info. on this thread, Bruce McKay of Viaduct Capital has a related article in The Press today, ‘Effects of Liquidity Rule Far Reaching’. (Not online yet.)
I guess my question now is, if requiring banks to hold more onshore deposits and low risk assets seems just as, if not maybe more, effective than the OCR in actually throttling ‘bubble-chasing credit’, WHY didn’t Dr B. implement these rules earlier in the cycle to stem the flow, before it led to the problems we now seem to have?
Why?
Maybe not an OIA question, but one I’ll certainly be asking on 29th January 2010:
http://www.mea.org.nz/events.aspx
Cheers, Les.