Why do Home Loan Rates keep climbing despite RBNZ's OCR assurance?
Despite the Reserve Bank of New Zealand (RBNZ) assuring us that there won't be any more Official Cash Rate (OCR) hikes, home loan rates have continued to march higher, leaving many investors scratching their heads.
Jarrod Kerr, Chief Economist at Kiwibank, sheds light on the reasons behind this unexpected development in his latest newsletter, which we will now examine.
Unforeseen Volatility in the Wholesale Rates Market
Kerr points out that the recent surge in home loan rates can be attributed to an extremely volatile wholesale rates market. Various market-moving events, combined with illiquidity, caused local banks to face significant challenges, leading to higher borrowing costs.
Kerr states, "It wasn't that long ago when Kiwi rates markets factored in a peak in the terminal rate around 5.5% and rate cuts commencing from February. Unfortunately, it was not meant to be."
Swift Increase in the 2-Year Swap Rate
One of the key indicators of the recent rate volatility is the 2-year swap rate, which experienced a dramatic surge. Kerr highlights that the rate climbed to a high of 5.75%, a significant increase from its recent low of 4.92% and the 5.15% recorded at the start of June.
This sudden shift in rates led the market to price in a terminal rate of 5.75% and pushed rate cuts deeper into 2024. However, Kerr disagrees with this view, suggesting that rate cuts may occur earlier than projected by some commentators.
Impact on Fixed Rates for Mortgages and Businesses
The surge in wholesale rates directly impacted local banks' ability to offer competitive fixed rates for mortgages and business lending.
As banks use wholesale swap rates to price these rates, the sharp increase forced them to adjust their fixed rates upwards.
Kerr emphasizes the interconnectedness of banks' pricing mechanisms, stating, "You want a 2-year fixed rate, we pay the 2-year swap rate. It's all about locking in the spread between the two, on the two."
This synchronized approach among banks, combined with limited market participation, exacerbated the upward movement of rates.
Understanding the Market Dynamics
The challenges faced by local banks in adjusting home loan rates are not isolated incidents. Kerr highlights that this situation is not unusual and can be predicted with relative ease. The reliance on wholesale swap rates and the synchronous movements among banks contribute to the market's vulnerability during periods of volatility.
Furthermore, when other market participants, such as fund managers and hedge funds, withdraw from the market, it amplifies the impact on rates.
Understanding interest rate market dynamics is crucial for both borrowers and investors seeking to navigate the evolving landscape of New Zealand's home loan market.