Downgrade could hit mortgage rates

Finance Minister Bill English. Photo / Mark Mitchell

The downgrade of New Zealand's economy by two ratings agencies could result in mortgage rate rises, Finance Minister Bill English said yesterday.

But economists say the move should not cause a big rise in borrowing costs immediately because local banks do not need to raise much money.

Standard & Poor's (S&P) lowered its long-term foreign currency rating on New Zealand from AA+ to AA and its long-term local currency rating from AAA to AA+, following a move made by Fitch earlier in the day.

Fitch and S&P are two of the three major credit ratings agencies in the world. Moody's, the third, has held firm its AAA rating on New Zealand with a stable outlook.

S&P said this country's strengths - including economic resilience and a sound financial sector - were offset by high foreign, household and agriculture sector debt, a dependence on the commodity sector and fiscal pressures associated with an ageing population.

"The blowtorch is very much on the Government to really start acting on some of the policy options they've been canvassing with the many working groups and task forces [set up to address economic problems]," said Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research.

BNZ senior economist Craig Ebert said little had changed in New Zealand's economic situation, and the downgrades were probably linked to continuing global uncertainty.

The downgrades would contribute to a rise in funding costs for banks, which would be transmitted into the interest rates consumers paid on fixed-term mortgages, said Westpac senior market strategist Imre Speizer.

He said most banks were well-funded, so they would not be going out into the market to borrow for some time.

"Over the longer term eventually [the downgrade] should hit term mortgage rates," Mr Speizer said. "Bear in mind also that most borrowers are on floating rates and those will be much less affected."

In a press conference yesterday afternoon Mr English conceded that interest rates could rise.

"A downgrade, in conventional wisdom, would tend to lift your [interest] rates a bit."

Labour finance spokesman David Cunliffe said the Government's reputation was "in tatters" and New Zealanders could expect to pay more for their mortgages as a result of the ratings cut.

"[Prime Minister] John Key said at the time of the last Budget that if we got a credit rating downgrade that would add 1 to 2 per cent on everybody's mortgages ... and that avoiding a downgrade was their top priority," he said.

"Well, whatever they thought they were doing hasn't worked because they've had two downgrades in one day and New Zealand has a crisis of confidence."

The New Zealand dollar fell from above US78c to US76.92c against the US dollar yesterday morning after news of the Fitch downgrade hit markets at 5.30am.

The S&P ratings cut had little impact on the kiwi, which was trading at US76.71c at 6pm yesterday.

Mr Speizer said the two downgrades supported Westpac's expectation that the New Zealand dollar would move towards around US72c over the coming weeks.

The New Zealand stock market held strong with the benchmark NZX-50 index finishing the day up 1.31 per cent.