For a long while, the Westpac economics team has warned that interest rates cannot stay low forever. It has long-anticipated a construction boom and double-digit house price inflation. It reasoned that as these things normally generate inflation pressures, the Reserve Bank would be required to increase the Official Cash Rate to 5.5 per cent.
Until recently, financial markets saw things differently. Market pricing delivered longer-term fixed interest rates that were only slightly above floating or short-term rates. In effect, markets did not "believe" that the OCR would go up by much.
Westpac felt this created an opportunity for borrowers.
By locking in reasonably low interest rates early, borrowers could avoid the worst of the proposed interest rate cycle. When asked, it recommended that borrowers fix their interest rates rather than float.
How things have changed. Financial markets have done an about-face. Longer-term fixed rates have risen very sharply in recent months, first on wholesale markets and then for mortgages. Long-term fixed rates are now significantly higher than short-term rates.