Economic data spooks markets

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The wholesale interest rate market has completely priced in a Reserve Bank rate hike at the end of this month and fixed term mortgage rates have been rising in reaction in the last week.

Tuesday, October 4th 2005, 6:37AM

by Janine Ogier

Lenders increasing rates at the short and long end of the fixed rate market numbered well into the double figures last week, with one- and two-year rates significantly affected as funding the loans becomes more expensive.

Two pieces of economic data last week spooked wholesale interest rate market players into pricing in a 25-basis-point rate hike at the end of the month.

The September National Bank of New Zealand Business Outlook survey showed that inflation expectations have risen while activity expectations were mostly unchanged.

The second-quarter gross domestic product figures showed continued economic strength. GDP grew 1.1% in the quarter, stronger than the RBNZ and average market expectations of 0.8%.

Separately, ANZ economists have moved to forecast a cash rate hike this month.

“With inflation pressures continuing to build, and the magnitude of the moderation in economic activity continuing to be questioned, we suspect the Reserve Bank’s patience has run out after repeated warnings in June, July and September,” ANZ head of market economics and strategy Cameron Bagrie said.

“At this stage we are erring on the side of caution and expect 7% to be the peak in the cycle. But if the market does not buy in to the RBNZ’s desire to stiffen market pricing, or the New Zealand dollar declines sharply, the RBNZ will be inclined to deliver the subsequent move in December,” he said.

Financial market anticipation of a hike will be too tempting an opportunity for the RBNZ, he said.

More tightening eliminates any prospect of lower rates before late 2006, he said.

On the other hand, Westpac economists have expressed a few nerves, but believe the economic developments don’t justify the extent of the market’s swing. Plus, there’s a month to go before an RBNZ decision.

In mortgage news, there were many fixed rate changes, mostly with shorter term rates heading higher.

Many lenders raised every fixed rate they offer.

One-year rates still range from the 7.6% offered by Southern Cross to 8.40% from GEM Home Loans.

There were 18 lenders who announced increases in this part of the market in the last week, while one, PSIS, cut its rate to 7.85%.

Two-year rates now range from TSB Bank’s 7.50% to the 8.75% offered by Headstart.

Again, rates increases were the norm, with 17 lenders moving their rates up.

At the long end, five-year rates range from Kiwibank’s 7.15% to GEM Home Loans’ 8% and there were 13 increases.

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