KEY POINTS:
Mortgage costs are likely to keep rising for months despite governor Alan Bollard cutting the Reserve Bank's official cash rate from 8.25 to 8 per cent yesterday.
With 88 per cent of mortgage debt in fixed rate loans, people whose two- or three-year loans mature in coming months will still face a jump to higher rates than they have been paying, economists warn.
The mortgage rate borrowers are rolling off right now is around 8.1 per cent. If they re-fix for two years they will struggle to find a rate much below 9.2 per cent and so would face about a 13 per cent rise in their mortgage interest bill.
"The average rate borrowers are facing is still going to increase, for another six months at least," ANZ National Bank chief economist Cameron Bagrie said.
Another factor is the global credit crunch, which is still going strong and has pushed up the cost of the money banks raise on international markets, the source of about a third of their funding.
Announcing the official cash rate cut yesterday, Dr Bollard said: "The cost of funds raised abroad by banks has been rising in recent months as the international financial situation has deteriorated. Today's cut will help to mitigate the effect of these increases on the actual borrowing costs paid by firms and households."
Mr Bagrie said yesterday's official cash rate cut had only averted an increase in the interest rates banks charge for new or renewed mortgages.
Now that Dr Bollard has started cutting the cash rate, the money markets are betting that he will keep on doing it, at least another five times, which would lower the OCR to 6.75 per cent.
But that does not mean that retail rates available to borrowers will drop to the same degree.
ASB yesterday announced it would drop its two-year fixed home lending rate by 0.25 per cent to 8.95 per cent and said it was reviewing its other mortgage rates including its floating rate.
But Kiwibank, which has led other markets down with interest rate cuts this year, said it would not immediately cut rates again. Kiwibank spokesman Bruce Thompson said the state-owned bank had essentially anticipated the Reserve Bank's move with its earlier cuts.
Bank of New Zealand chief economist Tony Alexander said that over the next 12 months less than half of the OCR reductions might be passed on to borrowers.
The Kiwi dollar dropped by the best part of a cent against the US dollar yesterday, to an eight-month low, helpful for exporters but not for consumers of imported goods like petrol or exportable ones like cheese.
- ADDITIONAL REPORTING BY NZPA
