BNZ Weekly Overview - May 14 2009

Welcome to the May 14 2009 issue of the BNZ Weekly Overview.

First of all many thanks to all those who responded to our monthly survey. The results give the most up to date timely measure of business sentiment in NZ and show a huge sigh of relief that the Great Depression scenario has been avoided.

This week we concentrate on interest rates in the WO. Specifically we discuss why the Reserve Bank’s claim that bank floating mortgage rates are too high has no merit. If anything they are actually too low. We also discuss the issue of whether it is worth staying floating either before fixing in the near term or simply because one thinks that will give the cheapest mortgage servicing cost for the coming year. Hardly.

If a 0.5% cut in the OCR to 2.5% cannot produce a fall in floating mortgage rates then a possible extra 0.5% cut from the RB may also elicit no response – because we banks don’t fund at 2.5% from the RB. The no brainer choice then between floating at 6.49% or fixing one year at 5.49% is obvious for those who want to minimise short term costs. For those wanting to fix we see little chance of fixed mortgage rates falling much in the near future unless the world economy tanks anew (couldn’t be 100% ruled out). I would personally opt for a three year rate if I were currently floating waiting to fix. The cost is only 0.26% more than floating anyway and I gain good rate certainty. Floating gives no rate certainty.

WOMay14.pdf

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