BNZ lifts interest rate predictions

Borrowers planning to fix their mortgage but who haven't done so have well and truly missed the boat, says BNZ chief economist Tony Alexander t

Tuesday, September 7th 1999, 12:00AM

Borrowers planning to fix their mortgage but who haven't done so have well and truly missed the boat, says BNZ chief economist Tony Alexander.
In the latest New Zealand Observer, Alexander says that floating mortgage rates will rise by two to three per cent in the next 18 months. However, he also expects fixed rate mortgages to increase in response to a worsening balance of payments, worries about center-left government policies, higher US bond yields and Y2K liquidity concerns.
Alexander says the cost of borrowing fixed for three years has risen 1.5 per cent over the past five months. After two years, there's a strong chance it will cost more for fixed than floating.

"This suggests a mixture of floating and two year fixed could be best. Fixing one year gives little protection not only from rising floating rates but from your own tendency to panic and fix long when the overall environment is one of rising rates," he says.
"Our view is that fixed rates will reach nice new cyclical lows before three years are up, and fixing three years could cause you to miss these lows or face a break cost."
Alexander notes that the bank's key interest rate forecasts have increased from recent months, reflecting a weaker New Zealand dollar and the Reserve Bank's "more forthright" attitude. He got stuck into the RB's warning that it may increase the Official Cash Rate (OCR) before the end of the year, saying its forecasting of when this tightening would occur had been shifted forward by two years in the space of only five months.
"This is an astounding change and a clear signal that the RB remains as volatile an implementer of monetary policy now as they have always been."
However, BNZ's official view is that monetary policy is more likely to be tightened on November 17 than at the next OCR review, September 29.
As for the economy generally, Alexander says that has plateaued now that interest rate-driven euphoric spending has levelled out. Predictions are for a recovery from the shrinkage of 0.2 per cent in the year to March to growth of 3 per cent by March 2000 and 3.9 per cent by March 2001.

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