Interest Rates

Thursday 28 May, 2009

Early this week wholesale interest rates edged down as there was a rise in worries about the world economy and falls in both share prices and the NZD. But over the past couple of days borrowing costs have crept back up again as sharemarkets have recovered on the back of a small lift in support for the green shoots hypothesis. At the end of it all the one year swap rate for which premiums get added before we banks get our ultimate cost of funds for that term has ended near unchanged from last week just over 2.95%. The three year rate is unchanged near 4.15%, and the five year rate also unchanged near 4.85%.

The yield on 90-day bank bills has ended near 2.81% from 2.92%. The next review of the official cash rate occurs on June 11 and we see a good chance of a 0.25% cut to 2.25%. There is nothing else interesting to write here this week.

Key Forecasts

• Monetary policy easing with the official cash rate at 2.0% come mid 2009.
• Medium to long term housing rates have seen their multi-year lows – stop-start rises now lie ahead. Speed unclear.

If I Were a Borrower What Would I Do?

Nothing new to add this week sorry, just a repeat of last week. To whit…If I plan to float for the next 12-18 months I would not. Given little chance of floating rates falling from the current 6.49% I would fix one year at 5.49%. It seems a no-brainer.

If I am only floating so I can fix I would be in no great hurry but would aim to fix three years at 6.75%. We see little chance of sizeable falls in fixed rates from current levels.

Source: Tony Alexander, Chief Economist of the Bank of New Zealand.