The official cash rate is expected to fall into negative territory by April
Mortgage rates could drop below 2 per cent within the next year, economists say, as the world reacts to the fallout from Covid-19.
The official cash rate is on hold at 0.25 per cent until March but it is increasingly expected that it could fall into negative territory by April.
Auckland Savings Bank (ASB) economists said they had revised their interest rate forecasts and expected home loans could soon fall below 2 per cent. At the moment, banks are offering rates from 2.55 per cent.
They said that mortgage interest rates were influenced by a range of factors, including the official cash rate, developments in domestic and global fixed-interest markets and other influences on bank funding costs – as well as quantitative easing.
Quantitative easing is all about driving longer-term interest rates in the economy lower and bolstering liquidity, both of which support demand in the economy, they said. Although the Reserve Bank is buying government bonds, it expects the action to also drive retail interest rates lower, as lower wholesale borrowing costs are passed through to retail customers and its actions provide banks with another source of funding besides term deposits and wholesale funding.
That is what has happened over recent months, with mortgage rates and term deposit interest rates dropping, they said.
They said they expected mortgage rates to fall over the coming year and if the Reserve Bank cut the official cash rate to -0.5 per cent next year, as ASB forecast, fixed-term mortgage interest rates could dip below 2 per cent over the year ahead, and all fixed terms should stay below current levels for the next two or three years.
Lower interest rates were likely to boost asset prices, they said. Interest rates should settle at levels well below long-run averages over the past 20 years.
Historically the mortgage curve has been ‘tick-shaped’, with one- to three-year fixed rates lower than both the variable and five-year rate, ASB’s economists said.
It is a very flat tick now, with all fixed rates below the floating rates at present. The lowest rates on offer vary between the main banks but are generally in the ‘belly’ of the curve – from one to two years, the economists said.
These low rates are nearly 2 per cent below the floating rates, at or near record lows, and available with rates around 2.6 per cent. At the other end of the curve, five-year rates are 1.25 per cent or more below floating rates, and in the low 3 per cent range now. They said fixing at the lowest rates on offer and then rolling over short terms would probably be cheaper over five years than fixing for a longer term.
NZIER principal economist Christina Leung said mortgage rates below 2 per cent were possible next year.
Interest rates both here and abroad have fallen sharply as central banks around the world embark on an extraordinary amount of monetary policy stimulus aimed at lowering interest rates to encourage spending and investment, Leung said.
ANZ chief economist Sharon Zollner agreed it was highly likely. She said it would require a bank funding for lending scheme that allowed banks to lend at rates that were not linked to the rates they paid depositors. At the moment, banks have to lend at a premium above what they pay savers.
She said, the decline in mortgage rates is likely to continue to be a stepped process as there are still a few ducks for the Reserve Bank to line up, but the market is already pricing a good chance of a negative official cash rate. That is entirely reasonable given most forecasters are now anticipating it to happen.
The impacts of extreme monetary policy on an economy’s long-run health is certainly a point of debate but the impact on asset prices is pretty clear to see globally over the past decade or so, she said. ANZ expects a one-year rate of 1.8 per cent by March 2022.
The direction of travel for interest rates remains in a downward direction, with additional work by the Reserve Bank over the next six to nine months likely to provide the right conditions for retail banks to drop mortgage rates to around 2 per cent, said Infometrics economist Brad Olsen.
He said, keeping interest rates low will support the economy by allowing businesses to invest and access funding but will also funnel considerable money into the housing market, which could well keep house prices in a stronger position than what we originally expected. Many will now be working on how to pull together a deposit to take advantage of these incredibly low interest rates.
Mortgage rates also look to hold at lower levels for longer, which will allow more people to fix their mortgages at lower levels over the next few years. These lower levels will support borrowing over the short to medium term but changes in banking costs over the longer term are likely to see interest rates push higher once the economic fundamentals return towards normal, he said.
He said the low rates would push savers to find other places to deposit their money. In effect, that could push savers to look for riskers investments in the stock market for those that might not have invested in shares before. Property will also remain a favourite for New Zealanders to invest in.