Interest Rates

Monday 9 March, 2009

Over the past week we have seen some downward movement in short term wholesale interest rates as the timing for the next official cash rate cut approaches. But longer term borrowing costs have crept up as an increasing number of corporate borrowers are deciding to take the bird in the hand of a low fixed rate now rather than holding off for possibly lower rates further down the track. The thinking behind their actions is that at some stage the world outlook will be less dire and when that happens attention will turn to the inflation risk from current huge central bank liquidity injections and the need for monetary policies to be tightened again. When that change in sentiment occurs longer term borrowing costs will jump quite sharply.

The yield on 90-day bank bills has ended near 3.16% from 3.32% last week while the five year swap rate has moved up to 4.26% from 4.11% last week and 3.9% five weeks ago.

Next Thursday morning the Reserve Bank will review the official cash rate and following the 1.5% cut late in January, which followed a 1.5% cut at the start of December, we are expecting a reduction of 0.5% this time around. We still see scope for the cash rate to bottom out at 2% toward the middle of the year though it will be interesting to see if the Reserve Bank feels the need for a decent pause in rate cuts.

And just to finish off this week – keep in mind that with huge uncertainty continuing about the global economy one must also recognise huge uncertainty with regard to exactly when and where interest rates bottom out this year. Keep that in mind when considering when to shift one’s fixed interest rate exposure further out along the curve.

Key Forecasts
• Monetary policy easing with the official cash rate at 2.0% come mid 2009.
• The five year fixed housing rate to fall below 6%.

If I Were a Borrower What Would I Do?

Given that wholesale long-term interest rates have risen a reasonable mount over the past month I've given up hoping that I'll be able to get a 5.5% five-year fixed interest rate over the next few weeks. But I still think there's a decent chance of somebody offering a rate below 6% with that view based upon an expectation banks will start to offer more discounted interest rates over those longer terms as has traditionally happened when interest rates start getting towards the bottom of their cycle. So for the moment I would still be either floating or fixing for six months but looking to shift towards that five-year fixed rate some time almost certainly before the middle of the year. Next week's revision of the official cash rate by the Reserve Bank is probably worth waiting for if one is contemplating fixing at the moment just in case they cut interest rates more than we are expecting.