The financial markets are now heavily pointing to sharp falls in local interest rates, bolstered by the sheer weight of money from overseas investors.
The two-year swap rate, a key component for fixed mortgage rates, has dropped to 4.20% from 4.96% a month ago, reflecting a strongly-held view that theReserve Bank will soon loosen what have been tight monetary conditions.
Other parts of the yield curve have also seen a downward shift, but more so in the short end.
Home mortgages are already easing, and more falls look likely, going on the wholesale market indicators.
The Reserve Bank’s Official Cash Rate currently sits at 5.5%.
The speculative end of the interest rate market - overnight indexed swaps (OIS) - point to at least a 50/50 chance of a rate cut at the Reserve Bank’s next opportunity on August 14.
The OIS market also suggests 75 basis points of cuts by the end of 2024.
A year from now, the market points to an official cash rate of 3.66%.
“It’s telling us that monetary conditions have been tight enough, such that it is squashing the economy to get inflation under control and that the process is all but done, and that the market is now looking at some normalisation of rates,” BNZ economist Doug Steel said.
The economy had “essentially been going nowhere” for the last 18 months.
“Demand has weakened a lot, and that has diminished firms’ pricing power,” Steel said.
At its last reading, the Consumers Price Index (CPI) came in with a 3.3% gain in the June year - just outside the Reserve Bank’s targeted 1% to 3% range.
“There are some things that are still increasing in price, such as local authority rates and insurance, but broadly speaking the core general measure of consumer prices has been falling and it is close to the Reserve Bank’s target,” Steel said.
BNZ says the CPI may well drop within the 1-3% band in the current quarter.
“That then would allow the Reserve Bank some scope to relax tight monetary conditions.”
The dovish tone of the Reserve Bank’s last monetary policy review gave the market the green light to take rates lower.
“Exactly when is difficult to pin down, but I think there is there is a very strong consensus that rates are going down really soon, and by quite some,” Steel said.
Falls in the wholesale market rates have already flowed through into the retail mortgage market, which is priced partly off the swaps curve.
Even though the OCR has not changed, monetary conditions have eased thanks to moves in the market.
Wholesale interest rates have been falling. Photo / NZME
“There has been a lot of ‘receiving’ from international investors expecting rates to come down,” Steel said.
“The global community sees New Zealand as being similar to the world and there has been movement overseas with many central banks easing and others lining up to do so.”
The US Federal Reserve is expected to keep its rates on hold this Thursday morning, but the market is laying bets on a September cut.
Steel said overseas investors have taken the view that New Zealand rates are currently too high and have taken positions accordingly.
David Cunningham, chief executive of mortgage broker Squirrel, said mortgage rates tend to lag moves on the wholesale markets.
“There always tends to be a bit of a lag from the wholesale market - one, two, and three- year swap rates - but most customers are on six to 12-month terms.”
He noted one-year swap rates have fallen from 5.40% to 4.80%, or 0.6 of a per cent, since the start of the month, so home rates can be expected to fall by similar amounts.
“The thing to remember though is that term deposit rates are the biggest source of funding for retail banks, so we won’t see a home loan rate for one year drop by 0.6% of a per cent until we have a similar drop in term deposit rates.”
Cunningham said a cut from the Reserve Bank in August “feels unlikely”.
Instead, he backs a 0.5 of a point cut by the central bank in October.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
