Forecast released as emergency stimulus addressing COVID-19 starts to unwind
The Reserve Bank of New Zealand (RBNZ) has started unwinding the emergency stimulus delivered in response to the impacts of the COVID-19 pandemic. With many experts expecting the central bank to lift the official cash rate (OCR) soon, ANZ economists have estimated how high mortgage rates might go.
ANZ’s latest NZ Property Focus shows that the two-year swap rate, alongside the two-year fixed mortgage rate, is currently around 1.05%. However, markets expect the swap rate to rise around 1.65% in two years, approximately 1.8% in three years, and above 2% in five years.
“That’s not a large rise in the context of where the two-year swap rate has been in the past 20 years or so. However, remember that this rate went negative (yes!) at the end of 2020, and it has already doubled from around 0.5% a couple of months ago,” said ANZ chief economist Sharon Zollner, senior economist Miles Workman, and senior strategist David Croy.
Over the next year, the economists predict mortgage rates to top 4% – and mortgage holders with a fixed mortgage for longer terms would most likely be prepared.
“But even that will only delay inevitable rises unless we see market interest rates fall in the future,” ANZ economists said. “That is certainly possible if, for example, another crisis were to come along, prompting the RBNZ to slash interest rates again.
“But that’s probably a case of ‘be careful what you wish for’ in terms of comfortably making your mortgage payments. And rate cuts are not something we currently expect based on the outlook as it stands now.”
Read more: Major NZ banks update mortgage rates
According to ANZ, other reasons to expect interest rates to rise by less over the coming cycle than in the past cycles include:
- The unknown impact of the cessation of quantitative easing (QE) on the economy; and
- The RBNZ buying significant volumes of bonds via its Large Scale Asset Purchase (LSAP) programme since the COVID-19 pandemic hit the country.
“What will make the upcoming increase in interest rates unique is that household debt levels have never been as high they are now, nor grown as quickly as they have over the preceding 12 months,” ANZ economists said.
“And on top of that, households have minimal levels of time-certainty, having understandably opted for shorter rather than longer-term fixed mortgage terms for cost reasons. The government has gone in the other direction, having extended the term of its borrowing to beyond 20 years.”
Other experts are also flagging the likelihood that interest rates will rise in late 2021, taking the OCR back above 1% by the first half of next year, while nearer to 2% by the end of the year.
“If that does occur, mortgage rates are almost certainly going higher. Yet many households are relatively unprepared for this, having opted for shorter-term fixed mortgage terms that have been cheaper than longer terms, which obviously offer greater certainty,” ANZ economists said.
