KEY POINTS:
Mortgage interest rate cuts like those announced by ANZ National Bank yesterday may not stimulate demand for home loans because borrowers are worried about their jobs.
ANZ National Bank, the country's biggest bank, is cutting its two-year fixed rate to 7 per cent and its three, four and
five-year fixed rates to 7.10 per cent. The yield curve of its fixed-rate mortgage products has flattened.
Industry observers said the moves brought the bank's brands into line with other lenders and reflected falls in the wholesale interest rate swap market.
The move also comes as economists call on the Reserve Bank to cut the Official Cash Rate (OCR) further at its next announcement on January 29.
Westpac predicted yesterday that the rate - which is now 5 per cent - would drop to 2.5 per cent by the middle of this year, by far the lowest since it was introduced in March 1999.
But other commentators are not sure any change would make a difference to consumer confidence.
"I'm not sure that the level of interest rates is the major disincentive to borrowing currently. The major disincentive to borrowing is questions like: 'Am I going to have a job next week?"' said David Tripe, director of Massey University's Centre for Banking Studies.
The state of the job market is seen as important in influencing sentiment about the economy, which is bleak.
Mr Tripe said funding costs were higher for longer-term fixed mortgage rates but swap rates on the money market had come down. The margin between swap and fixed mortgage rates continued to be historically high.
The five-year swap rate was around 4.65 per cent on Monday, fallen from 5.05 per cent in mid-December and still well below the new ANZ National five-year fixed mortgage rate of 7.10 per cent.
During so-called mortgage wars, the difference between swap and fixed mortgage rates has been less than 100 basis points, or a full percentage point.
Mr Tripe says the swap rates have fallen by more than banks are reducing rates. Still, banks are facing higher funding costs in the current credit crunch but just how much higher is not known.
The Reserve Bank is expected to cut the OCR further. It was last adjusted on December 4, when Reserve Bank Governor Alan Bollard slashed it by 1.5 percentage points, taking it to 5 per cent. The OCR has been cut from 8.25 per cent in the middle of last year.
BNZ economists said a cut of 75 basis points, taking the rate to 4.25 per cent, was likely on January 29.
The New Zealand Institute of Economic Research said there was "huge scope" for the Reserve Bank to cut interest rates, probably by between 50 and 100 basis points, but possibly by more.
- NZPA