Mortgage rates start to rise

Wednesday 18th March 2009

New Zealand longer-term fixed-rate mortgages are on the turn and have risen since the central bank cut the official cash rate to a record low 3% last week.

Combined with a strengthening New Zealand dollar, the trend has Westpac economists questioning whether the Reserve Bank will need to move again quickly to lower the OCR further, especially if economic growth figures for the fourth quarter are worse than expected.

Westpac is more bearish than other forecasters, saying in its preview for the December 2008 quarterly GDP figures that it expects a 1.1% economic contraction, equal to a 2% fall in GDP from the same quarter a year earlier.

"An outcome for Q4 on our expectation would be a downside surprise to the RBNZ," said Westpac chief economist Brendon O'Donovan. "Confirmation that consumers were saving the increases in cash flow, businesses were hunkering down and exporters were struggling before the full force of the international meltdown hit would certainly argue for easier monetary conditions," he said.

"The tightening in monetary conditions since the March MPS certainly seems the wrong medicine and in direct contrast to the balance of conditions outlined by the RBNZ," he said.

O'Donovan cited ASB Bank's increases of up to 0.5 percentage point on fixed rates between two and five years, even while there remained downward pressure on short term rates.

Most major banks either have yet to move their longer rates up, or say they priced in last week's OCR cut before the RBNZ announcement.

The central bank last week predicted a 0.8% fall in GDP between the September and December quarters, and the market consensus is for a 1% fall.

A negative 1.1% quarter would be the worst quarterly reading since the 1991 recession, Westpac said. The only bright spots were a slight rise in agricultural output and increased government spending.

By Jonathan Underhill

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