New Zealand's record-low mortgage rates look likely to stay low despite a bump in bond yields.
Banks have availed themselves to $1.04 billion in cheap funding from the Reserve Bank's 'funding for lending' programme (FLP) since the scheme kicked off last month, data from the central bank shows.
The programme - which is aimed at keeping interest rates low while the economy recovers from the impact of Covid-19 - means commercial banks can borrow at the official cash rate (OCR) - currently at 0.25 per cent - for a period of three years.
The borrowing adjusts over the term of the transaction with any changes to the OCR.
In its November monetary policy statement, the Reserve Bank said the effectiveness of the programme would depend on financial institutions passing on declines in their funding costs to borrowers.
While there was unlikely to have been a "mechanical" link between the FLP and Westpac's move last week to cut its one-year fixed mortgage rate to 2.29 per cent, the Reserve Bank would nevertheless have been pleased with the reduction, Harbour Asset Management fixed income and currency strategist Hamish Pepper said.
Central banks' efforts to keep interest rates low comes against the background of rising bond yields in response to the unexpected success of the Democrats in Georgia, which gives them the balance of power in the US Senate and paves the way towards greater fiscal stimulus than previously anticipated.
US benchmark bond yields have gained 21 basis points this year to 1.13 per cent, putting upward pressure on bond yields, including New Zealand's.
Federal Reserve Chair Jerome Powell last week sought to stamp out talk of a premature reduction in the US central bank's massive bond-buying campaign, saying "now is not the time" to hold that discussion.
Harbour Asset's Pepper said any moves higher in bond yields will be met with stiff resistance from central banks.
"Are we on a trend higher? I don't think so, because central banks' game plan will to continue to buy bonds and to continue to expand their balance sheets to provide support," he said.
Nevertheless, analysts do see a tension developing between forward-looking markets pricing in a return to more normal conditions and central banks wanting to keep rates low.
"They (central banks) will not want to see them materially higher," he said.
"Labour markets are not as healthy as they would like and inflation is not high enough," Pepper said.
Any market-driven move higher in yields would need the blessing of the central banks "and I don't think that that will come any time soon".
Pepper said the mere existence of the FLP should keep downward pressure on New Zealand mortgage rates.
But David McLeish, fixed income and cash portfolio manager at Fisher Funds, said it was still open to question as to whether FLP would achieve its intended goals.
"It's still a little bit early to tell if it is going to be a success or not," McLeish said.
"A billion dollars has been taken up now, so that's a good start, but there is plenty more of that required if is really to see those benefits that the Reserve Bank wants to see," he said.
He agreed that tension appeared to be building between market forces and central banks.
"There are some quite nascent inflationary pressures building at this stage - not just globally with a bit more fiscal stimulus out of the United States now that the Democrats have more control in the house - but other factors such as supply chain disruption, which affects New Zealand in particular," he said.
There were other inflationary factors such as higher commodity prices and the strength of China's stronger renminbi, which is making China's ' exports more expensive for the world.
ASB said the diminished risk of deflation suggests that the OCR is unlikely to move lower from its current 0.25 per cent record low.
"However, the Reserve Bank is expected to maintain highly stimulatory settings until it is confident economic activity and the labour market have turned the corner. This will mean tolerating higher inflation if need be," ASB said in a commentary.
The Reserve Bank will utilise other policy levers - including the FLP and its Large-Scale Asset Purchase Programme (LSAP) - to keep borrowing costs low and bolster liquidity.
LSAP - which allows the Reserve Bank to buy up to $100 billion of Government bonds in order to keep a lid on bond yields - re-starts this week.