Homeowners’ Rush to Fix Mortgage Rates Helps Compression of Wholesale Interest Rates

Homeowners rushing to fix their mortgage interest rates are adding to the upward pressure on wholesale interest rates right now, according to Kiwibank economists.

And they see all of this translating into more “upside risk” for mortgage rates.

Kiwibank raised its mortgage rates Tuesday, aligning with recent increases by other major banks.

In their weekly publication First View Kiwibank economists – Chief Economist Jarrod Kerr, Senior Economist Jeremey Couchman and Economist Mary Jo Vergara, say there is currently an “imbalance” in wholesale markets that will continue in the next statement by Reserve Bank monetary policy to be released on November 24.

Back in may Kerr pointed out that New Zealanders were particularly exposed to changes in interest rates, as 60% of mortgages were either floating or ready to be re-fixed within three to six months. Meanwhile, 80% of mortgages were ready to be re-fixed within the next six to 12 months.

Kerr then noted that it was “a huge flux of fixation in a tightening cycle.”

In this week’s First View, Kiwibank economists say it’s important to “note the illiquidity” in the Kiwi wholesale rate markets right now.

“In May, we hammered the table on the likely hike in interest rates.”

Economists said that at the time they noted that there was significant upside risk to Kiwi interest rates and the Kiwi dollar – and that they were wary of fixings linked to mortgages “in the days, weeks and months to come ”.

“In the end, interest rates exceeded our non-consensus forecast,” they say.

“Even we were surprised on the bright side.

“And the mortgage fixation – which is exacerbating movements in the markets – has paid off.”

Economists say banks have found themselves trying to hedge mortgage flows, paying the fixed rate in swaps, “in a market where there is little and far on the other side (receiving the fixed leg)” .

“This imbalance will continue in the RBNZ’s November MPS. The imbalance indicates increased upside risk to mortgage rates.”

The pressure on wholesale interest rates increased further last week after the publication of super hot inflation figures for the September quarter.

“Wholesale interest rate markets surged higher, with an OCR of 2% [Official Cash Rate] now priced. All the major banks have raised their mortgage rates. The Kiwi currency has also taken off, finally making some gains through the crosses.

“… There are more advantages to interest rates and the Kiwi currency, in our opinion.”

Kiwibank economists say the “shock of such a surge in inflation” has led us to revise their own OCR outlook.

“We still expect the spot rate to hit 1.5% by the middle of next year. The next step will be a 25bp rate hike to the November MPS.

“But more appears to be needed to ensure inflation is contained. Two more rate hikes are now likely, bringing the spot rate to 2% by November of next year. We had previously forecast that the spot rate would remain at 1.5%.

“We expect to see the revised RBNZ forecast upwards, again, in November. We expect the RBNZ inflation track to move up. And the OCR track of the RBNZ will be mechanically lifted in response.

“We expect the OCR track to move forward and increase, with an endpoint of 2.2-2.3% in 2023/24.

“Such a shift in the forecast will add upward pressure on the Kiwi’s rates and currency. The RBNZ’s forecast changes are likely to bolster the rise in wholesale markets, in what will become a self-fulfilling push to the top. .

“All loan rates, and savings rates, are more likely to go up (again).”

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