Mark Lister says don't be in a rush to fix your mortgage. Photo / Getty Images
Mark Lister says don't be in a rush to fix your mortgage. Photo / Getty Images
COMMENT:
Short-term interest rates are set to fall even further, following the Reserve Bank of New Zealand (RBNZ) announcement that a Funding for Lending Programme (FLP) will begin in December.
This will see the RBNZ lend money directly to banks at rates very close to the OCR, which is ata record low of 0.25 per cent.
The FLP is designed to reduce funding costs for banks, and lower interest rates. It is hoped this will support the economy and provide some additional economic stimulus.
This move was widely expected, although one surprise was that the programme won't be tied to business lending, as many had expected.
This could see it add fuel to the housing market fire, as prospective homeowners and investors take advantage of lower interest rates.
With the advertised term deposit rate at 0.85 per cent for six months (before tax), there is already a strong incentive to invest in better returning options (like shares or property).
The FLP will exacerbate this dynamic even further and will be supportive for asset prices generally.
It also sees New Zealand edge closer to the uncharted territory of a negative Official Cash Rate (OCR) in 2021.
The RBNZ has also requested that companies across the financial services spectrum prepare their systems and processes to cope with such a move.
It is important to note that this would only occur behind the scenes within the banking system. Homeowners wouldn't face negative mortgage rates, nor would depositors be forced to pay banks for the privilege of holding on to their money.
It would, however, mean that both mortgage and term deposit rates fall further still, while it could also put some downward pressure on the NZ dollar.
We should point out that a negative OCR is certainly not a foregone conclusion. The New Zealand economy has been performing much better than many expected of late.
Stronger house prices have boosted activity, some measures of business confidence are back to pre-Covid levels and Fonterra has upped its dairy payout to levels well above the 10-year average.
We've also put the US election behind us, which reduces some of the political uncertainty that prevailed earlier in the year, and we've had some positive news on the vaccine front.
Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. Photo / Supplied
If things continue to hold up well over the coming months, one would have to question the need for something as dramatic as a negative OCR. There are also concerns over its effectiveness, which is why Australia and the US are reluctant to employ such a policy.
However, under Governor Adrian Orr the RBNZ has demonstrated a desire to act swiftly and decisively, and to do more rather than less. That means we can't rule it out.
Either way, interest rates are set to head lower, and how people feel about that will depend on their situation. Borrowers can look forward to even cheaper rates, while life is likely to get even more challenging for savers.
Don't be in any rush to fix your mortgage, you'll probably get a better rate in a few months' time.
Meanwhile, if you're one of the many New Zealanders with money sitting on term deposit at the bank, you might be in for a shock when it matures and your friendly banker breaks the news about your prospective new rate.
Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. This column is general in nature and should not be regarded as specific investment advice.
