ASB responds to higher wholesale money costs by raising 3, 4 and 5 year fixed mortgage rates just prior to the holiday break

ASB responds to higher wholesale money costs by raising 3, 4 and 5 year fixed mortgage rates just prior to the holiday break

ASB has announced it is raising long term fixed mortgage rates.

This comes after markets moved wholesale swap rates higher in response to expectations that the US Fed's first rate hike in a decade is not the last.

ASB's moves involve both their specials - for terms three to five years - and their standard rates for four and five years.

The increases flow through to their BankDirect and Soverign brands as well.

But rates at the shorter end are unchanged at this time.

The three year 'special' has been hiked by +26 bps to 4.75% from 4.49%.

The four year 'special' has been hiked by +20 bps to 5.15% from 4.95%.

And their five year 'special' has been hiked by +16 bps to 5.25% from 5.09%.

Similar hikes to standard rates for these terms have also been announced. So ASB now has the opportunity to ease back on its 'specials' without changing standard rates in the future, effectively pushing through another hike again.

These rises have nothing to do with the RBNZ's recent OCR change - it was a cut after all - and everything to do with rises in wholesale swap rates.

Wholesale swap rates started moving higher at the end of November (when the three year swap reached a low of 2.78%) until Thursday (when the same 3 year rate reached 2.97%. That is a rise of +20 bps. Ironically, these same rates have slipped a little in the latest trading, but the trend higher underpins ASB's move.

All this shift higher relates to the cost of money in the future as signaled by the US Fed.

At the same time, the risk premium has risen. The unusualness of the policy change is raising uncertainty. The only way we really have to watch this is to follow the Australasian CDS spreads for 5 year investment grade bonds. That is not an exact match, but the best proxy we have. And that shows widening spreads (that is, investors want fatter premiums to lend to banks). At the end of November, this index was sitting at 109 having already risen from 99 at the beginning of November. By last Thursday it was sitting at 113. That isn't a huge change although inside this short time-frame it will have been noticed by banks.

If wholesale rates continue to trend up over the holiday break, it is certain other banks will follow ASB. If not, they may be forced into a retreat.

But don't be surprised if in fact this move heralds a general steepening of the rate curve.

The era of very low long term rates are under threat.

Still, there is still time to lock in some very good deals if you think the story about rising rates is persuasive. Of course, no-one really knows, not even the banks (and certainly not me). But borrowers will need to make their own assessments

We would expect most of the main banks will use the holiday period to make similar adjustments as ASB, perhaps with the exception of ANZ who already have fat rates for longer term durations.

The real mortgage competition however is for the shorter terms: two years or so. And while these rates have risen at the wholesale level, the pressure up has been modest to date. Keep watching our data for early signals. Shifts up of more than 20 bps is when you will see banks having to 'respond' to maintain margin.

See all banks' carded, or advertised, home loan interest rates here.

The new floating mortgage rates now compare across all banks as follows:

below 80% LVR Floating  1 yr  18mth  2 yrs   3 yrs   5 yrs 
    % % % % %
5.74 4.35 4.95 4.49 5.10 5.35
ASB 5.75 4.39 4.49 4.49 4.75 5.25
5.79 4.35 5.09 4.39 5.19 5.35
Kiwibank 5.65 4.49   4.49 4.85 5.35
Westpac 5.85 4.39 4.95 4.24 4.65 5.35
             
5.70 4.39 4.49 4.49 4.75 4.99
HSBC 6.10 4.25   4.49 4.99 4.99
HSBC 5.89 3.99 4.69 4.49 4.79 5.29
5.74 4.35 4.69 4.39 4.79 5.35

In addition, BNZ has a fixed seven year rate of 5.75%, while TSB Bank offers a fixed ten year rate also at 5.75%.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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38 Comments

Swap rates have since dropped back so these bankers have jumped to early - but what else would you expect from the bankers.

The trend to put up rates while the OCR stays as is or even goes lower is interesting however, the tide starts to go out on the bankers.

There is no 'trend to put up rates'. The OCR only effects rates at the short end, the longer end is really determined offshore (and heavily influenced by what the FED does). ASB only increased 3-5 year rates. Their floating rate did drop with the OCR decrease.

I expect the FED to lift rates again. They keep speaking about the need to normalise interest rates (which is FED speak for 'we know we have created the mother of all asset bubbles') and don't panic as the increases will be very slow coming (meaning ' we are terrified of sparking a bond market crash, so don't remove your cash, as we try and slowly deflate this bubble'). Often though, bubbles don't 'slowly deflate' they implode as people run for the exits. I wouldn't want their job, its damned if they do, damned if they don't.

It's quite possible the RBNZ will cut again sometime next year but we still could see 3,4,5 year rates move higher again. If there is a bond market crash will could see them move significantly higher.

I've said it before, and here we have proof, keeping our OCR high forces banks to be reliant upon exernal financing, and we all saw how great that was, last time a few debts went bad in the US.

You might wish to inspect the nation's perpetual desire to run current account deficits and examine how they are funded. Read more

Yet dropping the OCr and hence the exchange rate makes imports more expensive and hence less bought?

Are you proposing shutting down our nation of shopkeepers? It was recently asserted in the UK that if it wasn't for shopping the UK economy would have derailed.

Why are things black and white? There are too many imports over-priced by too many players, so yes we need less shopkeepers and more manufacturers.

Steven has obviously never been a retailer. Retail is the biggest employer by far in NZ. Without it there would be a lot more unemployed and more pressure on the benefit system. Try to think it through next time Steven before you make a comment about the economy. Every move in the economy has a consequence.

Dont be a shallow unthinking a**. I didnt say zero retailers, I said there are too many and not enough ppl making goods. Yes I am thinking about the economy, obviously as a vested retail interest you are not.

Speaking of retail, just went down the road for the Christmas shopping thing (Botany Town Centre)... got a park no worries (previous years there has been cars just roaming around for a space), plenty empty car spaces, it just seemed a normal shopping weekend, no ques at checkouts at all (I mean none), has everyone done their Christmas shopping early this year or is everyone waiting for Boxing Day???

Not that I am complaining, but I did notice a number of shops had more staff in the store than customers.

Talked to a friend in retail today, he told me it's very quiet. Another friend in the UK, tells me the UK is the same.

The numbers that are always interesting in retrospect is that of eftpos. As a doomster I am perpetually surprised that they keep going up :-P

Online shopping perhaps? I manage to do all my xmas shopping weeks ago and it simply showed up to my door.

I know you didn't mean zero retailers Steven. Any retailer who shuts down puts more on the dole. We are better off with people employed surely. Obviously I touched a raw nerve.

Not really. The only raw nerve you touched was my wish for us not to be a nation of shopkeepers selling cheap goods made in china. Now there certainly is a place for such, but I think consumerism is 60% of our economy? which is way too much. Further I think such massive retailing/consumerism has a limited lifespan, I think/hope it will be 1/2 what it is now in 20years as like housing it is non-productive. I certainly do not want ppl on the dole, but want them re-allocated to productive enterprises. What is the skill set of shop assistants btw? most on or near the minimum wage? hardly highly skilled, non-transferable and ire-replaceable are they.

Please tell us what we as a nation can manufacture and then try to sell to a nation of people who go to the Warehouse to buy cheap imports. Manufacturing has reduced here in size as we cannot compete with the cheaper input costs in Asian countries. Eg. Fisher and Paykel that manufactures overseas in some product categories.

We have a beautiful country and a lot of fantastic people, if we can just stop the financialisation of our economy, if we can live in a place where it doesn't take a life time of debt to pay off your house, where the basics of life are a human right. We are moving around here to paying for water, more financiaisation. We must have some of the most expensive fuel, electricity,food and rates in the world based on incomes.
In the meantime if China keeps devaluing then we are in for a lot of hurt.
>>
That is not all. China’s foreign exchange policy is unhelpful, perhaps deliberately so. By setting the yuan peg lower, she is effectively forcing the dollar to revalue, exacerbating a growing bad debt problem. China can do this because her economy measured on a purchasing power parity basis is larger than that of the US, and she dominates international trade.

http://www.financeandeconomics.org/commodity-losses/

Lots of manufacturing in NZ Gordon. And last weeks numbers show its booming.

You realize that exporting primary products (meat, etc) with a tiny value add counts as "manufacturing" in those statistics? Yeah. Those numbers are toilet paper.

we are very innovative people but it's hard to swim against the current of the financial sector. We have such a high cost structure that young people cannot save the money needed to start their own businesses. The banking sector wants to lend to houses, not risky startup's, wants us in peonage, slaves to the almighty dollar.
A country where %40 of everything we spend goes to pay the interest.

You have to wonder what is so hard

Occasionally I hanker for the resurrection of Muldoon - You get the sense would never put up with the banking situation we have now - he would have stitched them up long ago, along with the non-taxpaying multi-nationals - he was a hard man

It's a crazy world.
Japan Now Spends 43% Of Tax Revenue To Fund Interest On Debt
The US Is Now Spending 26% Of Available Tax Revenue To Pay Interest
Professor Margrit Kennedy writes that a stunning 35% to 40% of everything we buy goes to interest. This interest goes to bankers, financiers, and bondholders, who take a 35% to 40% cut of our GDP. That helps explain how wealth is systematically transferred from Main Street to Wall Street. The rich get progressively richer at the expense of the poor, not just because of “Wall Street greed” but because of the inexorable mathematics of our private banking system.
http://ellenbrown.com/2012/11/08/its-the-interest-stupid-why-bankers-rul...

Agree, these days I think the only thing most pollies stand for is whatever gets them the most a) votes, b) election funding. c) glory

It isnt about NZ retailing, its about being a small nimble global player who can turn on a dime producing niche good/high quality goods that are in demand for retailing worldwide. I go to "warehouse" sure, but not for much. As an example I shop for NZ grown, organic (if I can) food and other produce, I refuse to buy Chinese or American food due to GMO and in China's case lack of safety (think frozen fruit and garlic). There is a market for such good produce world wide and NZ has a green rep that is trusted.

F&P is I think all offshore except for design? or maybe medical equipment? Which has a high margin, (if not obscene) ergo I dont see there is a reason for it to be offshore except to make the most money off it. In fact that is almost a classic example, dont produce washing machines, produce medical equipment.

I agree partly with Steven, lots of retailers should mean lots of competition, and therefore reduced prices as retailers compete for the dollar, but there is definitely not enough people in manufacturing. Many of the goods sold here could be made here, but the move to Chinese manufacture rather than improving efficiencies and costs (the easy way out) has meant the loss of a lot of manufacturing jobs. This also has a long tem impact as we need to be able to employ the majority of the population in "low skilled' jobs, but as already stated - these were exported.

I understand, except it would not only be more retailers but more wholesalers. As two examples, a company I deal with importer a large quantity of a good from PMC in Korea. Sold it here at 2/3rds the price of the competition. The wholesalers in NZ screamed at PMC and the importer got knee capped (now they are importing a new brand from the EU). Second example was a local company here importing an item from the USA and after checking there was no wholesaler in NZ imported them directly at a very good price. The wholesalers complained again and the US head office stopped the next shipment(s). Both these were this year.

So what we can do is allow competition over the Internet, yet the retailers want it stopped. As an example a 64gb SD card for my camera here is $150NZD, I got 2, faster(probably), better quality (Lexar professionals) ones from Amazon for $89USD, so less than half the price.

Honestly I think NZ consumers are being stitched up at times.

"we need to be able to employ the majority of the population in "low skilled' jobs" yes I understand, the Q is do we accept/can we afford to keep unskilled ppl employed? Take trainers, 20 years ago (1998) when I came here a pair on Nike/adidias? (I forget which) were $180NZ, prices held up by tarriffs. Yet back in the UK for xmas I got 2 pairs at 25sterling each. That is a hell of a price (and probably un-affordable) to pay to keep the unskilled employed IMHO. So we employ ppl at the min wage and have shoes many ppl cannot afford or we pay them the dole and most ppl can afford shoes, a hard call IMHO.

I understand your points Steven. But wages are only one part of the cost structure. Annoys the s**t out of me that peoples reaction to competition is complaining. I especially agree that the NZ consumers are getting thoroughly ripped off by some (if not most or all) wholesalers. And worse the Government seems to prefer acting on behalf of the wholesaler and not the public. Part of the problem I believe is the third tier cost structures such as rent/lease, facility maintenance etc. I do know some business men who through shear bloody minded, hard nosed determination have managed to keep their costs down. But they play a rough game.

If the third tier cost can come down then even minimum wages are effective. Besides we need to keep people occupied or else crime goes up and the inevitable consequential costs follow. What is cheaper for the country?

Very good Qs and ones I dont have easy answers to. I used to live in Gower in South Wales over looking LLanelli (dont bother trying to pronounce it you have no hope) - https://www.youtube.com/watch?v=OWTONiIeNmQ This was an ex-steel making town and once closed crime "picked up" and life expectancy dropped. After some years (decades) the site(s) were re-developed into light industry feeding into the EU (with EU grant money), the above 2 trends reversed significantly. The problem with that is its a grow for ever model on a finite planet, cant be done for ever.

Yes and no. Depending which stats you choose. Retail has 50000 more but usually includes travel and hospitality when counted. Plus how many of those jobs are part time in retail.
Manufacturing is 2nd largest.
Manufacturing wages are around 50% higher than retail though.
You can work out which are more important for the longer term in NZ

Anyone having to work that out, will probably never.

Can anyone enlighten me?

What was the cause for swaps moving from 3 or so in 2012 ish up to 4.5 by 2014 and then all the way back down to where they are now if the Fed did not make any change to their rates? Was it the RBNZ and their OCR changes? If so, shouldn't the trend down continue or barely move considering the Fed moved by only .25? It's difficult to try and analyse the trend against historic data (even just the last 5-10 years) to understand each peak and trough - even at a generalised level.

'Market conditions prevailing at the time'.

Interest rate swaps have to do with fixing rates, the OCR mainly effects floating. One can move in one direction and the other in the other, thus the interest rate curve may steepen or flatten depending on market conditions.

OK, but isn't the whole premise of this article that swap rates are starting to rend upward and therefore longer term fixed rates go up but when swap rates were at a similar level a few years ago 3-5 rates were not where they are now? I'm not nit-picking, I am genuinely interested.

Swap rates are an indication of wholesale market expectations around the future direction of interest rates. Sometimes there's an anticipation central banks are poised to move their base rate higher (Fed Funds, OCR etc) and swaps will drift higher as we saw during the 'Taper Tantrum' a couple of years back. But often market expectations don't eventuate, especially on a short term basis, and swaps will settle back to more subdued levels. Competition in the banking sector at any given time will have an influence on bank margins (difference between swap and retail rates) which is why you might see swaps at a similar level to a couple of years back but retail rates different, or vice versa.

And I assume they are raising TD rates at the same time right....I mean, fair is fair...

Nope. As long as their are plenty of savers the banks here (and in the US) don't need to compete hard on TDs. Esp if the rate they can borrow from the RBNZ just got cheaper.

ASB strategy of leading the market for 3 year @ 4.49% failed since customers were asking discount on the carded rate hence they have raised their rates on longer term loans so they can provide 25 to 30 bps discount on carded rates. It's not a trend it's just marketing gimmick so it's all status quo at this present moment.