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Market update with Dr Ganesh Nana
In the house
Here’s Dr Ganesh’s latest take on the current economic situation and what it may mean for home loan interest rates.
Is uncertainty the new ‘normal’?
Uncertainty is the main factor driving the volatile movements in the global financial and currency markets over recent months. And, to be honest, how this uncertainty will be resolved is pure guesswork.
So, why the uncertainty? In a nutshell, the European and United States financial systems and institutions are still grappling with the effects of the 2008 crisis.
The European debacle is essentially the result of some governments borrowing too much over the years up to 2008, and now unable to pay back these debts. This has led the lenders (other European governments, their banks and financial institutions) to demand larger spending cuts by these governments as they (the lenders) aim to protect some of their assets. But, the lenders themselves will not want to push the borrowers further into the mire as that would make their (the lenders) assets even more worthless.
And Figure 1 shows the real impact of this turmoil in terms of increasing numbers of people without jobs. This is a reflection (in human terms) of the ‘austerity’ measures that are being imposed on some countries.
On top of this dilemma is the future of the single currency for 17 of the 27 members of the European Union. While the issue is not a straight forward issue, if the Euro is to continue to be viable as the single currency, then the tensions between the lenders and the borrowers have to be overcome. These tensions are not only showing through in the economic dimension (with jobs losses and recession in some parts of Europe), but also in the political dimension (with taxpayers in lender countries becoming more and more vocal in their opposition to ‘bailing out’ the borrowers.
Ultimately, this situation will be resolved through the political arena – effectively a judgement call by European leaders as to just how important they think the idea of a single currency is worth. There are a range of potential outcomes. One could be that some of the borrowers default on their debt. Another outcome could be the disintegration of the Euro with countries reverting to their individual currencies. Or the lenders could continue to help out the borrowers but force increasingly painful measures on the borrowing countries.
This uncertainty is having an impact on economic prospects across all of Europe with unemployment on the rise. This, of course, makes the ‘choices’ or ‘adjustments’ required even harder to implement – whether viewed economically or politically.
And while Europe is grappling with these problems, there are also financial issues in the US and Japan that are similarly tangled in webs of political influences.
So, what does this mean for New Zealand?
For New Zealand, this environment has resulted in an expected increase in the Official Cash Rate (OCR) – the interest rate set by the Reserve Bank of New Zealand (RB) – to be delayed. This is because the RB now considers it prudent to await the outcome of the current global turmoil, before deciding on when to increase interest rates. The RB had previously expected to increase the OCR as it believed the New Zealand economy was recovering well and there were inflationary pressures building that it needed to counter.
Now, however, the globally uncertainty means that the future of our recovery is also uncertain – as it is unclear how this uncertainty will impact on our largest trading partners Australia, China, Japan, and the US.
In addition, global interest rates are set to remain low with the United States Federal Reserve saying that it is unlikely that their interest rates would rise before the middle of 2013. Consequently, our inflationary pressures are being negated to an extent by the relatively high value of the NZ$ as overseas investors are attracted to the higher interest rates already here.
And, what of the uncertain future?
Looking immediately ahead, ongoing uncertainty will see the RB continue to hold official interest rates at their current level. I would pick March as the earliest when a rise is possible, but wouldn’t be surprised if it was later.
With official rates on hold, the remaining influence on mortgage interest rates will be the availability of funds from overseas lenders. Again, the uncertainty is important – this factor could further restrict the funds that overseas lenders are prepared to advance to the New Zealand banks to on lend for mortgages. While New Zealand banks are now less reliant on this source of funding than before the 2008 crisis, overseas investors still remain an important source for mortgage funds for New Zealand banks. If this source more difficult to access then domestic mortgage interest could nudge upwards in response, even if official rates stay on hold. I would, though, expect such movements to be relatively small adjustments, rather than large changes.
As you can see from Figure 2, floating (variable) and fixed mortgage interest rates have on average been almost unchanged over the past few months. In particular, floating rates remain around (on average) the 5.75 percent mark, with the only changes being marginal declines in longer–term fixed rates (3–year and 5–year rates).
A couple of months ago there were suggestions by some that short–term rates fixed rates (6–month to 2–year) may rise, as the demand from those on floating rates wishing to move to fixed rates was expected to increase. This move has not occurred, and is unlikely to in the near future, as most longer–term fixed rates remain significantly above the average floating interest rate.
For the record, the RB expects interest rates in a year’s time to be about 1% higher than current levels. This would be consistent with an orderly resolution to the problems in Europe and the US. But, because there is just so much uncertainty as to what will happen in Europe and the US I would be surprised if this occurred – I think the ‘interest rates on hold’ well into next year is the more likely scenario.
And to add to the mix, don’t forget that this time next year the US will be in the midst of a presidential election campaign. It seems that uncertainty is set to be the new ‘normal’ for sometime to come.
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Despite his passion for numbers, Ganesh’s approach to economics is first and foremost people-based. He believes economics is about people. It’s about their jobs, their incomes, their opportunities, and their futures.
In his role as editor of BERL Forecasts he’s responsible for BERL’s regular monitoring and assessments of the situation and prospects for the New Zealand economy. BERL Forecasts remains one of the most respected independent forecasting publications in New Zealand.
Ganesh has 25 years experience in economics since first working as a researcher at Victoria University. We’ve asked him to use his accumulated skills in modelling and analysis, combined with robust methodology to provide practical insights and a common sense commentary.
While every effort is made by BERL to ensure that the information, opinions and forecasts provided are accurate and reliable, BERL does not accept responsibility for any errors or omissions, or for any loss or damage resulting from reliance on, or the use of information, forecasts or opinions provided.
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