Reserve Bank Governor Alan Bollard yanked the reins of the money market yesterday to stop a rise in long-term wholesale interest rates resulting from a rush to fix home mortgage rates at present levels.
In a rare unscheduled statement, Dr Bollard described the rise as unwarranted and said he expected interest rates to remain at "relatively low levels for an extended period."
Wholesale interest rates promptly dropped about a quarter of a percentage point.
Economists said Dr Bollard's message was as much directed at borrowers as at dealing rooms, and amounted to a call of "Take it easy. Don't panic."
Demand for longer-term fixed-rate mortgages has soared in the past two or three weeks, apparently reflecting a belief that Dr Bollard has almost done his dash in rate cuts and will soon start raising the official cash rate.
As well, people have seen the vast sums being borrowed by governments around the world and concluded longer-term rates are bound to climb as a result.
"There has been an element of panic as people thought they had missed the boat," ASB Bank chief economist Nick Tuffley said.
That has resulted in a scramble by banks to obtain longer-term funding, pushing up the interest rates they offer and the mortgage rates they charge, compounding the effect.
But it is inconsistent with the economic outlook laid out three weeks ago by the Reserve Bank, which predicts an extended period of weakness reflected in an unusually long trough in the interest rate cycle.
The bank forecast 90-day wholesale rates would stay below 4 per cent until the end of next year.
The previous trough in short-term interest rates, in 2003, lasted only a few months.
"This is a completely different cycle,' ANZ National Bank chief economist Cameron Bagrie said.
"Dr Bollard is saying that, and that rates are going to remain down for some time, so don't panic."
Westpac economist Michael Gordon said there was no urgent reason to fix a mortgage rate right now.
"This is not to say floating is necessarily better than fixed. Rather it means the trade-off between fixed and floating rates in three or six months will probably be similar to what it is today."
Wholesale interest rates and the dollar fell yesterday after Dr Bollard's statement, but remained higher than they were three weeks ago.
The five-year swap rate was 4.27 per cent then. It was just below 5 per cent when trading opened yesterday and fell to 4.75 per cent after the statement.
And the dollar is still more than 5 per cent higher on a trade-weighted basis than it was three weeks ago.
If this tightening in monetary conditions persists, it will increase the pressure on Dr Bollard to cut the official cash rate by more than the half a percentage point he foreshadowed on March 12.
* Fixed interest five-year mortgage rate rises:
ASB 7.25 to 7.5 per cent
ANZ /National Bank 6.75 per cent to 7.5 per cent
Kiwibank 7.25 per cent to 7.6 per cent
BNZ 6.75 to 7.5 per cent
Westpac 6.75 per cent to 7.6 per cent