Jamie Gray

Jamie Gray is a business reporter for the New Zealand Herald and APNZ wire agency

Floating the way to go, says bank chief

Andrew Thorburn says markets are in a state of flux. Photo / APN
Andrew Thorburn says markets are in a state of flux. Photo / APN

It's the age-old question for borrowers: fixed or floating?

At a push, Bank of New Zealand chief executive Andrew Thorburn still thinks a floating rate mortgage is the way to go.

"In my view, it depends on how quickly interest rates rise, so that is the key, and importantly whether New Zealanders believe that we are going back to a much higher interest rate and higher inflation environment," Thorburn, a trained economist, said.

"When you think this thing through sensibly, that's just not going to happen."

People still have bad memories of double-digit mortgage interest rates and high inflation of the 1980s.

"I think those two things have been pricked. I don't think we are going back to a high inflation, high interest rate environment to anywhere near that level," Thorburn said in an interview with the Herald.

But he conceded that there would eventually be upward pressure on interest rates. "You are going to see rates rising steadily rather than rapidly, so that will probably mean that people will be more confident in staying with floating for longer, or maybe having a combination of the two - fixed and floating," he said.

Reserve Bank data for June showed that floating rate mortgages were the more favoured method of funding.

Of the 1.38 million mortgages outstanding in June, about 871,000 were floating and 504,000 were fixed.

Thorburn said financial markets were in a state of flux, reflecting the fact that the world economy is only part way through restructuring.

"You have got huge dislocations that have to be worked through," he said. "We are not going to go back to the way it was. The new 'normal' is here," he said.

America faces huge fiscal problems, parts of Europe are suffering from sovereign debt issues, but Thorburn stopped short of suggesting the world is on the cusp of another global financial crisis.

"What we saw in 2008 was absolutely extraordinary," he said.

"What we are seeing now is governments and corporates wanting to avoid that, and while it is very difficult, I think you are going to see people working together.

"And you don't have the severe bubbles that were in place, so I think therefore on balance, no."

Closer to home, Thorburn said that while the KiwiSaver scheme was a step in the right direction, the big issue was how to generate more savings.

- NZ Herald

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