Flurry of fixed rate increases

18 October 2005

Fixed rate increases numbered into the 20s for one-, two and three-year rates over the last week as inflation concerns dominated economic thoughts.

There were increases across the board for fixed rate home loans as Kiwis' high spending and low saving nature was emphasised by Reserve Bank of New Zealand Governor Alan Bollard on Friday.

Then the consumer price index for the third quarter on Monday showed inflation breaching the RBNZ's target range.

While that was expected, it was nonetheless an illustration of stark reality as the markets continue to price in further interest rate tightening. Bollard's speech implicitly backed the markets' pricing of a 25-basis-point rise in the official cash rate on October 27.

The headline third-quarter CPI increase of 1.1% was sufficient to raise the annual rate of inflation to 3.4%, the highest level seen since a temporary spike in inflation in the fourth quarter of 2000.

In the home loan market over the week, 24 lenders announced one-year rate rises.

One-year rates now range from the 7.60% offered by Southern Cross to 8.8% from GEM Home Loans.

Twenty-two lenders raised two-year rates, which vary from Housing Corporation and Loan Plan's 7.55% to the 8.75% offered by Headstart.

In the middle part of the market, three-year rates range from the 7.50% offered by Housing Corporation to Headstart's 8.55%. Twenty-one lenders announced increases.

Six lenders raised four-year rates and they now vary from 7.50% at Loan Plan and Public Trust to 8.15% at New Zealand Mortgage Funds.

A bunch of banks now offer 7.40% for five-year fixed loans, the lowest in that part of the market - ASB, BankDirect, Housing Corporation, Loan Plan and Kiwibank.

The five-year rates now rise to Gem Home Loans' 8.30%. Fourteen lenders raised this rate, but Westpac showed the sole decrease on the charts by cutting its five-year rate to 7.59%.

Westpac has also launched a special eight-month rate of 7.69%, just when most advice centres around taking up the attractive two- and three-year rates on offer until the economy gets some equilibrium a few years ahead.

To sum up sentiment among analysts, Goldman Sachs JB Were made some erudite comments: "Many households have circumvented higher floating mortgage rates by opting for cheaper fixed mortgages, which have been low due to low yields on the long end of the yield curve. Lower bond yields have effectively countered the RBNZ's policy tightening. "However, bond yields rose sharply in September and we expect them to move higher still over the year ahead.

"Resulting higher fixed mortgage rates coupled with a large stream of renewals due in 2006 should see the effective mortgage rate trend higher.

"We believe that under our scenario of the effective mortgage rate rising to 8.05% by the second quarter of 2006 this presents a compelling picture of households (finally) facing a tighter environment in 2006."

ENDS

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