Despite borrowers' rush to fix mortgages, ongoing OCR hikes should enable RBNZ to assert monetary policy power over most of them

Despite borrowers' rush to fix mortgages, ongoing OCR hikes should enable RBNZ to assert monetary policy power over most of them

By Gareth Vaughan

The Reserve Bank's monetary policy power over borrowers might be incrementally declining as more and more choose to fix their home loans, but if it follows through with more Official Cash Rate (OCR) increases in coming months it'll still be able to exert significant power.

The Reserve Bank today increased the OCR for the third time this year by 25 basis points to 3.25%. ANZ, the country's biggest bank quickly followed with increases of the same amount to its floating and flexible mortgage rates. Other banks are likely to follow. This highlights that the ability of the Reserve Bank to control consumer spending and inflation through OCR moves is boosted by having borrowers on floating mortgages or short-term fixed rates, rather than longer-term fixed rates. As their interest rates rise borrowers must spend more on interest payments, leaving them with less discretionary money to spend elsewhere.

In its June Monetary Policy Statement (MPS), the Reserve Bank notes between the end of January and the end of April this year the value of floating rate mortgages fell by $10.4 billion. Over the same time period the value of fixed-rate mortgages surged $9.7 billion, with $5.5 billion of this fixed for at least two years (about 3% of outstanding mortgages).

"The tendency to switch mortgages from floating to fixed rates is not new, the trend to move to fixed rate mortgages began two years ago. Thus estimates suggest the weighted average time before a mortgage faces re-pricing has roughly doubled from a low of 4.7 months in 2012 to 9.8 months at the end of April," the Reserve Bank says.

Or put another way, ANZ's economists noted earlier in the week moves in the OCR still exert a reasonable degree of monetary policy traction because the average duration of bank mortgage debt is a shade over nine months versus 20 months in 2007, with about 70% of the value of debt floating or fixed for one year or less.

'Quite a punch'

And in a press conference Reserve Bank Governor Graeme Wheeler said; "If you look at the interest rate duration of the mortgage market here by international standards it's very low. So if you take the average time to reprice mortgages in New Zealand it's still just under 10 months. So I think the (Reserve) Bank still has plenty of leverage in terms of interest rate policy."

"We still think it (monetary policy) carries quite a punch," said Wheeler.

The latest monthly Reserve Bank figures show as of April 30, the total value of residential mortgages was $193.314 billion.Of this 68.2%, or $131.755 billion, was floating or fixed for less than one-year. Another $37.611 billion, or 19.5%, was fixed for less than two years.

So if the Reserve Bank follows through with expectations for OCR increases of about 200 basis points over this year and next (see 90-day interest rate chart below), from the 2.50% it started at in March, that should flow through to a large chunk of New Zealand mortgages.

Incidentally, the Reserve Bank started tracking fixed versus floating mortgage data on a monthly basis in 1998. The highest percentage by value that has been fixed since then was 87.5% in August 2007. The highest percentage by value floating was 63% in April 2012.

Flattening curve

Meanwhile, the Reserve Bank points out that since its March MPS the yield curve has flattened (see chart below). This has been creating an interesting dynamic with some longer term bank mortgage rates being cut, as the OCR and floating rates have risen.

"The OCR was increased by 25 basis points at the time of the March Statement and again at the April OCR review. Expectations are for further increases in the policy rate, although the global trend towards lower interest rates has put significant downward pressure on rates for longer maturities. The three month bank bill rate is up 42 basis points while the 10-year swap rate is down 37 basis points, a significant flattening," the Reserve Bank says.

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

 

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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And the lack of conversation over the RBNZ asserting its monetary power on policy continues..
 
Where is the list of positive and negative affects?
First of all raising the OCR sucks money out of the system as people with debt face higher costs.......This is only slightly countered by deposit holders who will receive a little more.
 
Exporters have been affected yet again......and this begs the question as to why this group has been constantly targeted by authorities in NZ?
Also the question of how many people on low incomes will be affected? Can this group even tighten their belts further? How many more children will be added to the NZ poverty statistics?
 
Does the Policy Targets Agreement have the right inflation band in relationship to the GFC?
 
Is the primary function of the RBNZ met?  And is the primary function of the RB Act suitable?
 
When maintaining stability in the general level of prices there is a conflict between Importers and Exporters pricing......wouldn't it be better to allow the free market to address these needs rather than direct interference using the OCR?
 
There is a conflict in the purposes of the Reserve Bank Act when monetary policy designed to promote stabilty in the general level of prices is carried out independently from the Crown who has the right to determine economic policy?  These conflicts lead to distortions and ultimately it is the people who wear the outcomes of this conflict.

1A Purpose

(1) The purpose of this Act is to provide for the Reserve Bank of New Zealand, as the central bank, to be responsible for—

  • (a) formulating and implementing monetary policy designed to promote stability in the general level of prices, while recognising the Crown’s right to determine economic policy; and
  • (b) promoting the maintenance of a sound and efficient financial system; and
  • (c) carrying out other functions, and exercising powers, specified in this Act.

(2) This section does not limit the functions or powers given to the Bank by any other enactment.

Section 1A: inserted, on 10 September 2008, by section 5 of the Reserve Bank of New Zealand Amendment Act 2008 (2008 N

All good points Notanecon - although sounds like you could be a useful economist. 
Perhaps your analysis points to the fact that the RBNZ answers to a globally minded worldview that is not necessarily in the best interest of NZ citizens. Or perhaps not just to a worldview but also entities such as the IMF, the Fed, etc  which are more interested in a global set of objectives. 
How can a non-elected  organisation hold so much sway over an economy?   
Are we losing our sovereignty as a country?

I think you have also put some good points up MB......
I have stated before that citizenship appears to mean nothing other than being a stock unit to the country!
Raising the OCR will provide a slightly higher tax take to the Government......and the Government is the main culprit in adding to inflation via policy and spending....we all know what is happening to housing and the issues lie directly in the Governments hands and they are refusing to take action against the Councils and reform the RMA.
The RBNZ gets a direct benefit in raising the OCR........on the one hand the are tasked with maintaining price stability yet they are benefitting from price increases. How can the RBNZ play a neutral role in the economy when they are also invested in certain outcomes.
 
I don't think that the RBNZ should be allowed to invest in outside asset classes such as shares.
The RBNZ has an agreement called the Reserve Bank Act which they must administer the financial stabilty part and the Government the economic part. Even though these two are seperated functions they interact continually..... one can pull a lever which the other party can respond to......it gives the illusion of operating independently but it is impossible to have any point of seperation.
 
Wikipedia descibes collusion in the below writing but first I ask more questions..
Is it deceptive and misleading when there is an agreement betweeen 2 parties who state they're independent but through policy and legislation interact continually to limit open competition, or gain unfair advantage, or limit opportunities, or divide a market, or in effect price set?
Do Governments and their Entities have an exemption from this conduct? If so what piece of legislation or other relative document gives them this exemption?
 
Collusion is an agreement between two or more parties, sometimes illegal and therefore secretive, to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage. It is an agreement among firms or individuals to divide a market, set prices, limit production or limit opportunities.[1] It can involve "wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties".[2] In legal terms, all acts effected by collusion are considered void.[3
 
 
 

NOE
 
You are on the right track in many respects, but I dont agree about the collusion
 
Monetary Policy and Fiscal Policy are (supposedly) two opposing forces that should be in equilibrium
 
What you are seeing is an example where Fiscal Policies should be being implemented by Govt to overcome fiscal problems. If Govt doesn't act, that puts pressure on the RB to take monetary policy action that it shouldnt have to, in order to counteract distortions arising from "inert" passive fiscal policy
 
NZ has been in the middle of a rocketing-boom-period where fiscal policy should be putting away some of the surplus for when any downturn comes (did I say surplus? - what surplus? - where are all the surpluses?)
 
Lastly, (I have stated this before) The RBNZ Governor has his hands tied by an agreement with Govt. I was surprised Wheeler accepted the position and didnt give them the 2 fingered salute. Why take on a job where your hands are tied before you start?

The RBNZ and Government don't have to collude by way of secretive meetings whereby they agree on a particular course of action. But what we are witnessing is the effects of collusion.
 
The RBNZ has an investment in the building industry so price increases within this industry provides extra profit to them in the form of dividends......which the Government will receive some portion back from the RBNZ in the form of a dividends.
 
Then there is the issue of raising the OCR.......how much income does the RBNZ make off the OCR? And what percentage of this gets paid back in dividends to the Government?
 
The RBNZ is expected to pay dividends to the Government......it's looking like it is relatively easy for them to perform this task as the have quite a few control levers they can pull.
 
The effects of collusion appear to be rampant.
 

You really are deluded.
regards

Agree.
regards