Rating downgrades could keep OCR on hold for longer

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The downgrades to New Zealand's credit rating by two of three major international ratings agencies could mean the Reserve Bank holds its official cash rate at current levels for longer but they could also affect banks' cost of borrowing.

Friday, September 30th 2011, 2:41PM 2 Comments

by Jenny Ruth

Higher borrowing costs could lead to higher mortgage rates.

Earlier today, Fitch lowered its sovereign rating of New Zealand to "AA" from "AA+" citing concerns about New Zealand's high level of external debt.

Fitch's move was then mirrored by Standard & Poor's which said it expects "New Zealand's external position will deteriorate further at a time when the country's fiscal settings have been weakened by earthquake-related spending pressures and fiscal stimulus to support growth."

However, the third major agency, Moody's, reaffirmed its "Aaa" rating for New Zealand, the highest possible and the equivalent of Fitch and S&P's "AAA" ratings.

The New Zealand dollar fell about one US cent to as low as 76.57 US cents after the Fitch downgrade and the S&P move capped a latter rally. Wholesale interest rates also rose, the 10-year bond yield rising about 12 basis points.

"At the margin, it will probably raise the cost of funding but, in the scheme of things, it's not that huge," says Darren Gibbs at Deutsche Bank.

"At the margin, it makes it a little less likely the Reserve Bank will move the OCR," Gibbs says, but adds that impact is likely to be slight.

Craig Ebert at Bank of New Zealand, who coincidentally published a paper today showing New Zealand's indebtedness is actually relatively low compared with the other "rich" countries we like to compare ourselves with, says while the ratings agencies are raising genuine concerns, BNZ's view is they are manageable.

The impact on financial markets also needs to be considered in the context of current volatility, Ebert says. The NZ dollar has dropped from a peak at 88.44 US cents in late July.

"It could be a silver lining," Ebert says. "A lot of exporters out there will be breathing a big sigh of relief." The downgrades will also likely bolster the government's case for getting its books in order sooner rather than later.

Christian Hawkesby, head of fixed income at Harbour Asset Management, says while the downgrades may feed through into interest rates generally and into mortgage rates in particular, the impact isn't likely to be great.

Even an "AA" rating means "it's degrees of excellence we're talking about." The Reserve Bank's latest forecasts published earlier this month had already factored in higher bank funding costs, Hawkesby says.

Tags: Mortgage Rates OCR

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