An interest rate hike pause will give homeowners a chance
to reassess their mortgage choices. Photo by Craig Baxter.
Interest rates are likely to remain on hold until at
least March, when the Reserve Bank may lift its official cash
rate after an extended pause in its monetary policy tightening
Home owners with mortgages coming up for renewal will have
longer to decide whether to fix or float their new home
Economists say last week's labour data, dairy price weakness
and a persistently strong New Zealand dollar are key factors
in keeping the OCR at its current 3.5% until next year.
Earlier, economists were expecting a rise in December to
Housing prices and sales are also likely to come in below
Reserve Bank forecasts.
Westpac chief economist Dominick Stephens said yesterday
floating mortgage rates usually worked out to be more
expensive for borrowers than short-term fixed rates, such as
the six-month rate.
However, a floating rate might still be the preferred option
for those who required flexibility in their repayments.
''Among the standard fixed rates, we have no clear favourite.
"Shorter-term fixed rates, such as the six-month or one-year
rate, are currently low but are expected to rise over the
coming two years.''
Opting for the three or four-year rate would require higher
payments up front but would help the borrower if the Reserve
Bank did follow through with an extensive OCR hiking cycle,
At this stage, it was not clear which option would result in
lower average mortgage payments over the life of the loan.
Banks sometimes offered ''specials'' on particular fixed
They were usually good value, Mr Stephens said.
Yesterday, major banks were offering one-year fixed rates of
either 6.05% or 6.09%, two-year deals were at 5.99% and
three-year rates were 6.65%.
ASB chief economist Nick Tuffley said the interaction between
dairy prices, the dollar and interest rates suggested
something would have to give.
In the absence of a substantial rebound in global dairy
prices, or a substantial fall in the dollar, interest rates
would have to remain stimulatory for longer than ASB had
A longer pause in the Reserve Bank's tightening cycle would
buffer the New Zealand economy from lower dairy prices and
continued strength in the dollar, he said.
Recent inflation results suggested the Reserve Bank had time
on its side.
The latest labour market data showed a continued moderation
in construction labour cost growth in Canterbury, despite
strong construction employment.
''This suggests capacity pressures in Canterbury are not
translating to as much cost growth as initially feared.''
Annual headline inflation remained in the bottom half of the
Reserve Bank's 1% to 3% target band.
''Both we and the Reserve Bank do not expect inflation to
reach the 2% midpoint target until mid-2015,'' Mr Tuffley
Mr Stephens said dairy prices continued to tumble in
Fonterra's latest auction but the recent bout of weakness
could no longer be pinned on recovering global supplies.
Instead, it seemed to be because of weaker Chinese demand -
more cautious consumers and a resulting build-up of milk
powder stocks in Chinese warehouses.
There was no doubt the downturn in dairy prices would mean
pain for New Zealand's rural economy, he said.
For the Reserve Bank, that had to be balanced against
developments in the more domestically focused parts of the
At a glance
• Lower interest rates for longer
• Official cash rate on hold till March
• Special offers from banks usually good value
• Retail spending data out this week