Home loan borrowers can look forward to stable official interest rates this year after the Reserve Bank decided to leave rates on hold. We examine the factors shaping rates and ask our expert what lies ahead.

After recent volatility, floating home loan interest rates are tipped to remain on hold for the remainder of this year as the Reserve Bank ponders how to cool New Zealand’s hot residential property market.

Announcing his decision to leave official rates unchanged, Reserve Bank Governor Alan Bollard tried to talk down the housing market, warning that some investors could be heading for disappointment.

With national house prices rocketing up 14.2% in the year to June, Mr Bollard warned that buyers could ultimately see a correction in prices.

The Reserve Bank has cut official rates by three-quarters of a percentage point this year. But in its latest statement on monetary policy it foreshadowed moves to claw back those cuts over the coming 12 months.

Where to now for rates?
ANZ Bank Chief Economist, David Drage, says the next movement in rates was likely to be up, but not until next year.

"We believe that floating mortgage rates will be relatively stable for the remainder of this year and into the first half of 2004. Assuming that further gains in the NZ dollar are more moderate than seen earlier this year and a recovery in the world economy continues, we believe that by mid 2004 local inflation pressures will have become sufficiently compelling for the Reserve Bank to decide to start raising the official cash rate.

“This is likely to see floating mortgage rates rising over the second half of next year. A recovering world economy is expected to see longer term wholesale interest rates continuing to rise, which will put further upward pressure on fixed mortgage rates."

Advice for borrowers
While higher interest rates are never good news, Mr Drage says borrowers still have time to lock in a good value loan.

"I believe that fixed lending rates for terms up to three years still offer good value. These rates not only deliver an immediate reduction in funding costs relative to floating, but they are relatively low from a broader historic perspective."

Before locking into a fixed rate term, ask your lender about the early repayment charges that may apply if you decide to re-finance your loan before the fixed rate term has ended. For example, some consumers can be faced with large early repayment charges due to unforeseen life changes such as a move overseas.

Mr Drage says three key factors will shape home loan interest rates over the coming months:

• Market expectations regarding future monetary policy.
• Local and global economic developments.
• The NZ dollar.

What’s driving the rate cycle
Mr Drage says encouraging signs of a global economic recovery are one reason for the current rate freeze.

"Persistent weakness in the US economy during the first half of the year gave rise to fears of deflation, which saw US bond yields plunge to historic lows. This dragged down longer term wholesale interest rates in New Zealand and provided scope for lower longer term fixed mortgage rates to be offered. But recently we have seen more encouraging economic signs in the US and, combined with concerns over the size of the US government budget deficit, US bond yields have risen markedly. This has pushed up New Zealand longer term wholesale interest rates and longer term fixed mortgage rates.

"Ironically, floating mortgage rates have been relatively stable by comparison. The three rate cuts delivered by the Reserve Bank have led to broadly equivalent reductions in floating mortgage rates. With the Reserve Bank suggesting that the risks to inflation now appears balanced, we believe that the Official Cash Rate and hence floating mortgage rates are likely to be on hold for at least the remainder of this year."