There is still the prospect of Reserve Bank rate cuts this year, albeit later than previously thought. Photo / Alan Gibson

There is still the prospect of Reserve Bank rate cuts this year, albeit later than previously thought. Photo / Alan Gibson

The housing boom has sent household debt levels through the roof and interest rates are becoming a national obsession.

The Reserve Bank's cash rate calls and any other event or data supporting the case for a move in rates are breathlessly presented as signalling either imminent relief or pain for homebuyers.

While that relationship still exists, it has become increasingly muted. Since the credit crunch began last year, the official cash rate (OCR) has stayed at 8.25 per cent but mortgage rates have continued to move around.

New Zealand homebuyers now have an overwhelming preference for fixed-term home loans, which for the majority of the time are cheaper than variable rate mortgages.

This is a frustration for the Reserve Bank and its Governor Alan Bollard as any changes to the official cash rate, to the extent that they are reflected in mortgage rates, only affect households when they come to refinance their mortgage, which is usually every two years. This is the so called "pipeline" effect. Some would argue that given how much more indebted we are, the RBNZ's rate movements are ultimately more effective in influencing the economy, even if they take longer to work.

As the credit crunch rolls on mortgage rates have moved up, which may be ascribed to the pipeline effect, but they have also moved down.

Mortgage rates are clearly not bound by the RBNZ.

The key reason is that given New Zealanders' relatively poor record as savers, most fixed term borrowing is funded via the banks from overseas investors.

The banks, having a fixed rate of interest coming in off their mortgage lending, want a fixed rate going out on their funding. They achieve this via the so-called "cross currency interest rate swaps" market.

Ordinarily it's the rates available to banks on the swaps market plus a small "spread" or additional amount to reflect transaction costs and general market conditions that drives pricing for banks' overseas funding and thus local fixed mortgage rates.

Unfortunately, these are not ordinary times and the spreads have ballooned, but let's look at what drives the swap rates themselves.

BNZ chief economist Tony Alexander says swap rates are still to a large extent driven by the OCR, or more correctly expectations of where the OCR is going.

Mortgage rate increases early this year were to some extent driven by higher rates on the swaps market, in turn resulting from expectations that the RBNZ would again lift the OCR in response to fresh signs of inflation.