Why are mortgage rates rising when the official cash rate is expected to remain unchanged?

All of the country's major banks have lifted their mortgage rates by up to 30 basis points since last Monday. Photo / NZME

Commentators are divided over whether the latest round of mortgage rate hikes are justifiable - or if banks are simply seizing an opportunity to fatten their margins.

All the country’s major five banks have over the past week and a half lifted their mortgage rates by as much as 30 basis points.

Their moves came despite the Reserve Bank (RBNZ) in May saying it was done hiking the official cash rate (OCR), and economists agreeing the central bank would likely not lift the rate at its next review on Wednesday.

Nonetheless, ASB - the first bank to make major changes early last week by lifting its six-month to two-year rates - attributed the move to international factors rather than the OCR.

A spokesperson explained the money ASB lends comes from a variety of sources, including financial institutions that lend the bank money at wholesale interest rates.

“Over the past two years, wholesale interest rates have increased significantly and we have not increased our fixed home loan rates in line with these increases,” the ASB spokesperson told the Herald, when asked what prompted it to lift its rates.

But Squirrel mortgage broking firm founder, John Bolton, didn’t buy the argument and believed the bank was simply trying to increase its margins.

In his view, one-year swap rates hadn’t risen enough to justify the bank increasing its one-year mortgage rate by 20 basis points to 7.25 per cent.

What’s more, Bolton noted one-year mortgages had proven popular, as borrowers were betting on mortgage rates falling next year.

The latest RBNZ data shows that between February and May, the most popular duration of new mortgage issued had been for a year.

In May, the next most common type of mortgage issued was for floating rates, followed by mortgages fixed for two years, 18 months and three years.

Three-year fixed mortgages rose in popularity in May, as banks had been suggesting borrowers might be better off securing a lower rate for longer, rather than paying a higher shorter-term rate in the hope they could refix at a sufficiently lower rate in the near-term.

Late last week, Westpac hiked its two and three-year rates by 20 basis points and its 18-month and four-year rates by a bit less.

ANZ also lifted rates across all durations - mostly by 20 or 30 basis points.

Then this morning, BNZ lifted its three-year rate by 20 basis points and its shorter-term rates by lesser amounts.

Independent economic commentator and former RBNZ manager, Michael Reddell, said it was unsurprising mortgage rates were rising on the back of bond yields and swap rates tracking higher.

He noted banks tend to change their mortgage rates often (in either direction), as market conditions evolve.

Former Westpac treasurer turned consultant, Jim Reardon, noted two and three-year swap rates were particularly elevated, as traders in financial markets saw inflation persisting.

Indeed, data out of the US late last week showed employment being much stronger than expected in the high interest rate environment.

ASB economist Nathaniel Keall said the publication of these figures (which followed ASB’s rate hikes) was a catalyst for another jump in global bond yields, with these offshore moves remaining the main driver behind mortgage rate hikes in New Zealand.

“New Zealand bond and swap yields are roughly 20 to 35 basis points higher than a week ago, while an additional 15 basis points of RBNZ [OCR] hikes are priced,” Keall said.

Some economists believe the RBNZ will need to hike the OCR one more time in November to really stamp out inflation. Others believe this would be too much and the RBNZ should just wait for its rate hikes to filter through the economy.

Whether the RBNZ hikes the OCR again or not, Reardon warned borrowers should expect mortgage rates to remain elevated until there’s evidence of inflation is easing internationally.

While the RBNZ in May said it was comfortable with where mortgage rates were at the time, he believed it wouldn’t mind the market pushing rates a bit higher, as this would only help its inflation fight.

Reddell couldn’t say whether banks were being opportunistic, squeezing in extra big mortgage rate hikes, potentially before they have to start cutting rates.

But he concluded: “Banks don’t exist for the sake of you and me - they exist for their shareholders.”

He said banks make judgments based on what the market can bear, and currently, it looks like the property market may have bottomed out. Accordingly, banks may start finding it easier to sell mortgages.

While rapid interest rate rises had seen the banking sector’s net interest margin (a measure of profitability) reach an eight-year high in the December quarter, it fell back a little in the March quarter to 2.35 per cent.

The sector’s net interest margin wasn’t particularly high by historic standards, but RBNZ analysis shows New Zealand’s big banks are generally more profitable than those overseas.

Jenee Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.