Mortgage rates were unmoved by the RBNZ’s big hike as traders bet any increase now will be matched with a cut later

The Reserve Bank of New Zealand’s surprisingly large rate hike last week, intended to keep wholesale interest rates from falling, has seemingly failed to do the job. 

While 90-day bank bills rose 25-basis points in sync with the Official Cash Rate, longer term rates have hardly budged. The two-year swap rate was 5.01% at 9:30 am on Tuesday morning, down two basis points from the prior Monday. 

The five-year swap rate was five basis points lower than it was at the start of last week, meaning any increase to wholesale interest rates triggered on Wednesday didn’t even survive the weekend. 

Mortgaged households, who are already feeling squeezed by existing interest rates, should take comfort that retail lending rates are unlikely to increase from here. 

Jason Wong, an interest rate strategist at BNZ, said the central bank had been concerned lower swap rates would flow through to retail rates and was trying to prevent that from happening. 

“But the move has back-fired, with swap rates lower last week, and the two-year rate ending the week only three basis points higher than the level prevailing just before the RBNZ’s statement”. 

Traders were aware the weighted average mortgage rate would likely rise over 200 basis points even with no change in swap rates, and didn’t see any need for more increases.  

The RBNZ’s big move only flattened the interest rate curve - meaning short term rates increased while longer term ones fell - because traders thought higher rates now will mean lower rates in the future. 

Ross Weston, a senior treasury portfolio manager at Kiwibank, said retail mortgage rates had barely moved despite a 25 basis point fall in wholesale rates since February.

The central bank appeared to be targeting wholesale rates which could, in theory, put a floor under the whole market. 

“If wholesale rates fall too far, then the RBNZ comes out hawkish? Is that the new modus operandi,” he asked in a note. 

While traders have priced in another rate hike in May, they have also brought forward their expectations for rate cuts. 

“This is the problem with lifting the Official Cash Rate in large chunks. What goes up needs to come down (rapidly) and the inverted curve is testament to this”. 

Tug-of-war

In essence, traders think that any additional hikes will come with equal-sized cuts and longer-dated interest rates could plausibly fall in response to increases in the OCR. 

The reaction to Wednesday's hike demonstrates how the RBNZ’s policy holds the most sway over short-term interest rates, while market forces dictate the rest. 

With traders and the RBNZ stuck in a tug of war, most mortgage rates may have found their peak. 

Craig Ebert, a senior economist at BNZ, said it may look like the central bank’s big hike had backfired but that was only speculation. 

“The truth is, we’ll likely never know if the Bank has grossly misjudged things, as we don’t know the counterfactual. Might swap rates be even lower now, had the RBNZ not done what it did last week?” 

In any case, foreign investors have been willing to buy into NZ interest rates over the past week, betting that they will fall, and the RBNZ’s hawkish stance may have prevented a more meaningful decline. 

Westpac economist Imre Spizer said there was potential for two-year swap rates to climb back to their recent peak at 5.5% which most mortgage rates have already priced in.  

Mortgage holders have been opting for shorter-term rates in recent months, likely on the expectation that this is as high as rates will go. 

Floating rates have been following the OCR higher and will continue to do so, but fixed term rates have already declined this year - albeit only marginally.