Interest rates may not stay down much longer as prices move up

Friday 19th April 2002

The pattern of interest rate movements over the past six months was an example of what goes down must go up.

The table shows movements since October in interest rate yields on selected government stock maturities, three months' bank bills (a key to house mortgage costs) and retail offerings from registered banks and major finance houses.

Figures at October 19, 2001, and April 15 this year mark the cutoff points for The National Business Review's consideration of the topic.

The Reserve Bank's official cash rate (OCR) was included to round out the comparisons and rates at December 31 were useful because they recorded the position at the end of the calendar year.

Government stock yields and the rate on three months' bank bills rose between October and December and again in the period from the end of 2001 to last Monday.

There was a different pattern in rates available at the retail level. That possibly related to variations in the demand for funds outside the wholesale market and to different mixes in individual institutions' deposit/loan portfolios.

A fair number of people expected rates to rise this year. A National Business Review-Compaq poll conducted between December 6 and 10, 2001, and published on January 18 showed 45% of those polled expected interest rates to go up.

While that was down on the 59% with such a view in a poll a year earlier, it was a healthy percentage, given 31% expected rates to remain the same, 18% thought they would go down and 6% were unsure.

The interaction between interest rates, inflation, the exchange rate and the OCR was seen during the period since October and will apply for the rest of the year.

A Reserve Bank review of the OCR was made on Wednesday, when the rate was 5.25% compared with the 5% set earlier in the year.

CPI figures for the quarter and year ended March were released on Tuesday. The quarter's increase was 0.6% and the annual change was 2.6%, compared with 1.8% in the 12 months ended December.

Those changes were generally expected, although a little lower than the predictions of some economists. Others were "spot on" in their forecasts.

Price increases for various commodities, goods and services are well publicised when they occur, or are signalled, and there is little magic in assessing their impact on the CPI.

It was noted here in January there were signs of a possible rise in interest rates if a spurt in housebuilding and a consequent flow-on to existing housing stock, particularly in Auckland, increased inflationary pressure.

Most institutions have higher fixed and floating mortgage rates now than they charged at the end of last year.

It is impractical to include the movements here, because they varied depending on the lender and whether they applied to fixed or floating rates, or both, and to the loan period.

The changes were in line with increases in bank bills, the yields on other fixed-interest securities and the alteration to the OCR.

A rise in the rates borrowers pay to lending institutions has its usual favourable spinoff for the people who deposit money with the banks and finance houses. They are better off now than in December.

The position was more complicated when comparing retail rates this week with those payable in October, given the spread of returns between institutions and the maturity term.

People earning interest see some of their real income eroded when the CPI goes up, particularly when the movements comprise significant change to petrol prices.

Transport costs are built into the price of all goods and services.

Many businesses have resisted price increases in recent months but that is unlikely to continue much longer, as shown in recent surveys.

We then get more inflationary pressure, probably leading to a hike in the OCR and other interest rates.

The exchange rates also comes into the economic mix.

This column began with the observation that what goes down in relation to interest relates must go up.

The reverse will apply some time in the future, when what has gone up must come down.

INTEREST RATE YIELDS

Security	Rate 15.4.02	Rate 31.12.01	Rate 19.10.01	Change Oct-April

Govt stock Maturity
April 2004	6.41%	5.69%	5.26%	+1.15
Nov 2006	6.84%	6.33%	5.84%	+1.00
Nov 2011	6.94%	6.82%	6.41%	+0.53
Bank bills
Three months	5.77%	4.88%	5.12%	+0.65
Retail rates
Three months	4.55-5.15%	4.5-4.9%	4.7-5.1%	N/A
Six months	4.7-5.5%	4.5-4.75%	4.75-5.1%	N/A
12 months	5.4-5.75%	4.55-5.1%	5.05-5.3%	N/A

OCR	5.0%	4.75%	5.25%

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