War ends fixed loan rate falls

The war in Iraq is pushing interest rates higher and fixed loan rates are following.

Wednesday, March 26th 2003, 1:49AM

by Jenny Ruth

Recent trends in global wholesale financial markets suggest would-be home owners should hurry to snap up the low fixed rate deals currently on offer, although whether these trends continue is entirely dependent on the outcome of the US/Iraqi war.

Since the bombs started falling on Baghdad, the yield on US 10-year Treasury bonds have soared about half a percentage point from what was their lowest level since 1958. The market is betting that the US will quickly win the war, clearing the way for the US economy to rebound.

Where US bonds go, so the rest of the world’s wholesale markets follow.

"At the moment, there’s growing confidence that the war will be reasonably quick and contained," ASB Bank chief economist Anthony Byett says.

"What we’ve seen is the removal of the risk premium that’s built up in the last few weeks. If there’s a quick resolution to the war, you will see the fixed rates in New Zealand go up reasonably quickly."

Even if the war turns into a drawn-out affair, Byett doesn’t think fixed rate home loans will go any lower than they are now. "You’re talking catastrophic outcomes to see lower fixed rates."

A short war could put expected cuts in the Reserve Bank’s Official Cash Rate, and therefore in floating rate mortgages, on hold. "If there’s a sense of euphoria and relief after the war, there’s possibly an increase in consumer confidence around the world. People may spend more and there will be less reason for central banks to cut rates."

On the other hand, a protracted war would make it increasingly likely that central banks around the world will cut rates, Byett says.

Bank of New Zealand economist Craig Ebert notes that the start of war has also seen the US dollar rallying, halting the New Zealand dollar’s meteoric rise. The Kiwi looked headed towards US57c before war broke out, but ended last week below 55 cents.

The strength of the currency and its likely quelling impact on inflation is a major reason the Reserve Bank has been contemplating cutting rates.

Ebert says his view is that it’s most likely that the US dollar will resume its downward slide.

He isn’t at all sure that the market’s current view will turn out to be the correct one. "At the moment, much of the US economic news is still on the weak side."

He says it's hard to know whether that's due to the war or because the economy is fundamentally still weak.

Cameron Bagrie at the National Bank also has his doubts. "Markets at the moment are betting on a short war. They’re pricing in the perfect outcome," he says.

Nevertheless, he doesn’t think fixed rate loans are likely to get any cheaper either, unless "the shit really hits the fan -- global interest rates do look very expensive."

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