Floating rates sink while fixed rates rise

Although central banks both overseas and in New Zealand are cutting interest rates and floating mortgage rates are also coming down, fixed-term mortgage rates have begun rising again.

Friday, April 27th 2001, 3:42PM

by Jenny Ruth

Although central banks both overseas and in New Zealand are cutting interest rates and floating mortgage rates are also coming down, fixed-term mortgage rates have begun rising again.

WestpacTrust, for instance, cut its floating home loan interest rate last week from 8.25% to 7.95% immediately after the Reserve Bank of New Zealand cut its official cash rate from 6.25% to 6%.

But the same day, the bank raised its two to five-year fixed rates by between 20 and 30 basis points. The three-year rate rose from 7.1% to 7.4% and the five-year fixed rate rose from 7.4% to 7.6%.

Adrian Orr, chief economist at WestpacTrust, explains that while the Reserve Bank controls New Zealand's short-term interest rates, long-term rates depend on what's happening to world interest rates, most importantly those in the US.

US Treasury bond yields have started rising in recent weeks and New Zealand government bond yields have followed suit. The November 2011 bond, for example, has risen from as low as 5.83% on 19 March and was trading this afternoon at 6.43%.

That's much higher than the equivalent US Treasury bonds which are currently trading at 5.19%. `We're all accessing the same pool of international capital and there's a certain food chain as to who gets to drink first and at what price,' Orr says.

That's called a country's risk premium and New Zealand, being a small and internationally vulnerable country, has a premium of between 80 and 120 basis points above US yields.

US yields have been rising even though the Federal Reserve in the US has been cutting rates much more aggressively than New Zealand's central bank. While both banks began this year with their benchmark rates at 6.5%, the Fed 's federal funds rate is now down at 4.5%.

That's because the Fed wants to stimulate the sluggish US economy. Our central bank is faced with a reasonably buoyant economy but the slowdowns in the US and Australian economies, our major trading partners, threaten the longer-term growth outlook.

`Financial markets are considering that the end of the monetary policy cycle in the US isn't too far away,' Orr says. The markets expect the Fed may cut its rate to 4%, but it won't go much lower than that.

If the Fed's rate cuts produce the desired result and US growth picks up, `by the end of next year, we may be in a rising US interest rate environment,' Orr says.

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NBNZ calls for further rate cuts »

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