By Bernard Hickey
The Reserve Bank of New Zealand has again held the Official Cash Rate (OCR) at a record-low 2.5% as expected and has repeated its pledge to keep it there for the rest of 2013.
It also repeated it expected to start increasing rates in 2014, but has indicated that any hikes could be later and less than previously expected if the New Zealand dollar stays high and keeps imported inflation low.
The central bank forecast in September it would raise interest rates by around 2 percentage points from early 2014 to early 2016 and Governor Graeme Wheeler repeated that pledge earlier this month, adding it could increase mortgage rates to 7-8%.
But economists said after the latest statement the start to the hikes could be delayed and the amounts could be reduced a bit. The central bank said it was monitoring how its 'speed limit' on high Loan to Value Ratio (LVR) mortgages was affecting the housing market and repeated that it hoped it would slow inflation.
Wheeler said earlier this month the bank would need six months to know how much the limit was slowing house price inflation. The bank has previously forecast the speed limit would help reduce its projected increase in interest rates by about 30 basis points or 0.3%.
What does this mean for interest rates?
The Reserve Bank is slightly less concerned about inflation and economists are interpreting this to mean it can keep official interest rates low for a bit longer and not increase them quite so much.
Most economists still forecast rates will rise around 1.5% to 3% through 2014 and 2015.
Floating rates
Advertised floating mortgage rates have been broadly unchanged at around 5.7% since March 2011 and are likely to stay that way until at least early 2014, given the Reserve Bank's comments.
But there has been a big change in the structure of interest rates in recent months because of the Reserve Bank's new high LVR speed limit. Those borrowing less than 80% of the value of a property can get lower rates than those borrowing more than 80%.
Borrowers can often get cheaper than advertised deals through their brokers because the banks are competing hard for business, particularly for borrowers with more than 20% equity.
Fixed rates
Fixed mortgage rates have been rising in recent months and are now at or above floating rates, making the fixed vs floating decision a tough one. Fixed rates depend more on wholesale interest rate moves rather than the OCR.
They also depend on the banks' funding costs on international markets, which have been falling.
Fixing vs floating
The fixed vs floating decision depends on your outlook for the OCR and your personal situation.
A flat to falling OCR makes floating more attractive, while a fast-rising OCR makes fixing more attractive. In my view, the OCR is flat for now. It may rise next year, but not quickly, which means a mix of floating and fixed may be attractive. The Reserve Bank's decision today appears to shift the balance slightly towards floating rather than fixing.
Here's a way to work out whether to fix or float. It's Interest.co.nz's Fixed vs Floating calculator that compares the cost of fixing and floating, given the potential interest rate outlooks.
What others think
Bank economists are also mixed in their views on fixing vs floating.
BNZ's Tony Alexander said in his last note last week he would fix some and float some.
Westpac's Dominick Stephens said in this note this week he was indifferent on the issue of fixing vs floating.
ANZ's Cameron Bagrie said in this October 22 note that fixing for six months or 1 year looked attractive relative to the interest rate outlook.
ASB's Jane Turner said in this August 29 note that the advantage of fixed rates was fading.
What does this mean for the property market?
The prospect of lower interest rates for longer had encouraged many first home buyers and property investors to borrow and buy, particularly in Auckland and Christchurch where migration and a shortage of undamaged and watertight buildings is putting upward pressure on house prices.
However, the introduction from October 1 of the Reserve Bank's speed limit has restricted lending to low deposit borrowers. It's not clear yet what effect that's having on the property market, although the Reserve Bank has said there are some early anecdotal indications it is working to dampen demand.
Some new building has started in Auckland, but remains below expected demand from migrants from overseas and from the rest of New Zealand. The expected big increase in new house building in Auckland is yet to arrive and economists are concerned about relatively weak building consent growth in Auckland in September.
Migration has picked up in recent months as more New Zealanders come from from Australia and fewer leave, which is increasing demand for housing.
In September the Reserve Bank forecast annual house price inflation of 11% and 7% nationwide in 2013 and 2014 respectively.
Elsewhere in New Zealand, where there is more housing supply and less net immigration, house prices are more subdued, although they are heating up as the Auckland and Christchurch inflation spreads.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.