I’m getting to the age where I feel like I’m turning into one of the two crusty old guys who used to appear on weekly episodes of ‘The Muppet Show’. ‘Statler and Waldorf’ were a pair of Muppet characters who were best known for their cantankerous opinions and shared penchant for heckling from their balcony seats – consistently jeering the entire cast and their performances.
Like Statler and Waldorf, I watch the way that the Government and the Reserve Bank respond to the challenges of the property market and the wider economy each week and find myself frustrated by their actions and confused as to why they’re taking the measures that they’re taking, even when it appears obvious that they’re not working.
A good example of this would be the Reserve Banks current approach to the Official Cash Rate (OCR).
The OCR has been the primary tool by which the Reserve Bank has combated inflation in recent times and is at the centre of one of the major monetary policy innovations of the last 30 plus years. Put simply, the Official Cash Rate is the wholesale rate at which trading banks can borrow money from the Reserve Bank and is also used as a way of influencing interest rates (including mortgage interest rates). The Bank does this by increasing the OCR when inflation is running at a higher level than it is comfortable with – as it is right now – and lowering the OCR when the economy is sluggish, thus sending a signal to the Banks that it wants interest rates to increase or decrease.
It does this because, when interest rates go up, they divert spending away from inflationary goods and services and force us to use more of our available income to service debt. This may sound crude but it has worked for most of the past 30 years and has kept inflation under control, not just here in New Zealand but around the world.
But the success of the policy depends on the behaviour of the trading banks. As a general rule, they have always increased interest rates when the Reserve Bank has lifted the OCR, and reduced interest rates when the Reserve Bank has lowered the OCR (although some would say that they haven’t always done the second as quickly as they’ve done the first).
But right now, the trading banks seem to be ignoring the Reserve Bank. Over the past few weeks, you’ve probably noticed that mortgage interest rates have been stabilising, and even dropping, with some banks now offering 1 year fixed rates under 5%. This is despite the fact that the Reserve Bank is continuing to signal further increases in the OCR – in fact, last weeks increase of .5% hardly even caused a ripple in retail rates.
So why is this? Have the banks decided to no longer take any notice of the Reserve Bank in some sort of coordinated departure from historical practice? Probably not. What’s more likely is that bank lending rates are being influenced by two factors which haven’t been obvious.
The first of these is the strong likelihood that the banks had already ‘priced in’ the OCR increases that we’re seeing now. This simply means that they anticipated the Reserve Banks moves and put their rates up ahead of these announcements. If you’ve been watching the growing gap between bank mortgage rates and the OCR over the first part of 2022 you’ve probably seen the evidence of this.
The second factor at play is that the Reserve Bank isn’t the only (or even the major) source of funds for the Banks so it’s possible that they’ve been paying more for longer term funds than the OCR would suggest and that they’ve now reached a sustainable level of longer term-funding from other sources.
Whatever the reason, it would appear that (for now) the trading banks have settled on mortgage interest rates of between slightly less than 5% and almost 6%, depending on the term. This is consistent with where some commentators were predicting that they would land and introduces a level of (cautious) certainty that has been missing from the market for the first part of 2022.
Of course, this could all change quickly if there is another shock to the international economy, or if the Reserve Bank decides to get even more aggressive with rates than the banks appear to have anticipated – but for now, there’s cause for guarded optimism.
To understand more about what’s happening within the mortgage lending market and how it could affect you, talk to your Fundmaster representative.