A 1% increase could significantly impact the market
Many economists expect record-low interest rates to shoot up in the short- to medium-term – but independent economist Tony Alexander believes they will increase “fairly cautiously.”
Alexander said medium- to long-term interest rates – government bond yields, fixed interest rates – are likely to rise. However, the changes would likely happen deliberately as even a 1% increase could significantly impact the market.
“With the world economy looking like it is going to perform a heck of a lot better than anyone was reasonably expecting, people are looking at inflation picking up - so if you go back to October last year, since then, the cost to a bank in New Zealand of borrowing money at a fixed interest rate for one year has increased about 0.3%,” Alexander said, as reported by RNZ.
“For the three-year term, it has increased about 0.8%, and for five-year fixed-rate lending, the cost of that money to the bank has gone up by about 1% to 1.1%,” he continued. “So already their margins are under pressure, especially for the longer-term interest rates, but hardly anybody is borrowing beyond the one year term given the low rate of 2.29%, so the trigger for banks actually raising those longer-term fixed rates, which are at record lows, is probably going to be as soon as you and I get a bit scared and start borrowing at the three-five year term, then they will raise those rates.”
The economist predicts that the one-year fixed term rate would be at or only just above its current level within a year.
“Our Reserve Bank probably isn’t going to raise its official cash rate until maybe the middle-second half of next year... I think people who are determined to keep borrowing short term will still be finding that interest rate relatively low in the next 12 to 18 months,” he said.
Alexander expects interest rates to rise “a bit more than I or any others will forecast for you” in 2022 or 2023.
“The best you can hope to do is lengthen the period of time over which you can adjust to a shock. There are many borrowers who will religiously roll over a portion of their mortgage every year. They’ll have some at one, some at three, some at five,” Alexander concluded.
