Jamie Gray

Jamie Gray is a business reporter for the New Zealand Herald and NZME. news service.

Floating beats fixed - for now

The Consumers Price Index's meek rise lends weight to the argument for floating rate mortgages over fixed - for the moment at least, economists say.

Darren Gibbs, chief economist at Deutsche Bank NZ, said the CPI result meant floating rate mortgages remained attractive.

Economic growth was running at below the Reserve Bank's expectations and falling commodity prices - particularly dairy - would weigh on the bank's economic view, he said. Persistent currency strength was also helping to keep a lid on inflation, he added.

"I would still hold to the views that there is no rush to go into fixed," Gibbs said.

Some mainstream commercial banks have adopted a "hawkish" view on inflation, based on a strong pick-up in the housing market.

Bank of New Zealand chief economist Tony Alexander said the CPI result reinforced the fact that floating interest rates were likely to remain a feature of the borrowing market for some time. But Alexander has been making a case for three-year fixed because of the increased interest rate certainty that could be achieved for a relatively small difference between the rates.

Paul Dowling, East and Partners principal analyst, a Sydney-based independent Australian banking research and advisory firm, said low inflation would help take the pressure off the official cash rate, but that the key issue for borrowers would be the banks' cost of funds. In Australia the trend had been for banks to move contrary to the Reserve Bank of Australia's moves.

ANZ last week pushed its rates up, despite the RBA keeping its rate at 4.25 per cent.

"The same dynamic is playing out in the New Zealand market, so the issue is just how strongly connected monetary policy, based on managing inflation, actually is with bank pricing in the real world," he said.

- APNZ

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