RBNZ happy with short-term borrowers, expects Kiwis to stay more short-term like Aussies meaning less need for OCR hikes

By Alex Tarrant

The Reserve Bank says New Zealand mortgage borrowers are unlikely to jump into fixed rates from floating in any big hurry when it starts to push up the Official Cash Rate, with borrowers becoming more like their Australian counterparts, opting more for short-term mortgages than fixing long.

New Zealand's central bank left the OCR on hold at a record low of 2.5% today, and signalled modest and gradual increases over the next two years, which economists are picking to mean a peak of 4.5% to 5% for the OCR in its current cycle. See Bernard Hickey's article with more detail on the RBNZ's OCR announcement here.

Reserve Bank Governor Alan Bollard told a news conference when releasing the bank June Quarter Monetary Policy Statement (MPS) the majority of borrowers were on floating rates, or terms six months and less. This meant the RBNZ would have more effect when it did raise the Official Cash Rate, and that it would not have to raise the OCR as much as if more long people were on long term rates.

“New Zealanders, when they’re borrowing for mortgages, are now down to less than six months duration on average. That means that most are pretty much near floating rates, and that means if and when we do need to increase rates, we can expect to have a pretty quick effect," Bollard said at a media conference after releasing the RBNZ's June Quarter Monetary Policy Statement.

“So we think we can be quite patient whilst still watching to test that assumption [that consumer spending increases will be subdued],” he said.

The latest figures released by the Reserve Bank show 80.74% of the country's total NZ$168.001 billion worth of home loans were either floating or fixed for a term of less than one year in April. This figure, which excludes NZ$501 million of unallocated mortgages, is a record high percentage since the central bank's series on floating and fixed-term home loans began in June 1998 ahead of 79.85% reached in March.

The percentage of all residential mortgages on floating, or variable, terms has also extended its record high, reaching 52.62% after popping up above 50% for the first time in March.

See more in Gareth Vaughan's article here.

“At some stage more New Zealanders may look for fixed rates, but there’s no sign of that at the minute. Given the yield curve, we don’t expect that necessarily to happen in a big hurry. I suspect we’ll see New Zealand borrowers looking a little bit more like Australian borrowers, probably more short [term] for some time," Bollard said.

The Reserve Bank thought New Zealand borrowers were now more sensitive to rate increases.

"That’s another reason why our outward track for 90 day rates is consistent with not expecting the Official Cash Rate to have to go too high in this cycle," Bollard said.