The banks’ moves came as swap rates, which influence longer-term mortgage rates, spiked in the fortnight following the Reserve Bank cutting the Official Cash Rate (OCR) on November 26.
While the Reserve Bank’s forward track for the OCR suggested there was a slight chance it could cut the rate one more time in this cycle, its commentary was more hawkish than the market expected.
The market was prepared for the bank to keep the possibility of a further OCR cut on the table more firmly than it did.
The surprise spurred the market to reprice higher.
To add fuel to the fire, banks were concerned the Reserve Bank strongly suggesting the OCR was at its trough in this cycle would prompt a flurry of borrowers to fix their mortgages for longer durations.
The concern was that this rush could put further upward pressure on swap rates.
Indeed, the two-year swap rate is about 50 basis points higher than it was before Reserve Bank cut the OCR.
Patten noted banks went into the November OCR review with strong margins on their long-term mortgage rates.
While those margins are now very thin, he believed they could absorb higher funding costs – at least until they get a better steer on what would happen when the Reserve Bank next reviews the OCR on February 18.
Like many observers, Patten believed the Reserve Bank bungled its communications and didn’t intend its commentary to send swap rates a lot higher.
He feared higher mortgage rates could slow the economic recovery to the point the Reserve Bank is forced to cut the OCR again.
Indeed, its hawkish commentary at its May meeting, and its calls to push pause on cuts at its July meeting, resulted in it playing catch-up with a big 50-basis point OCR cut in October.
Patten’s advice to risk-averse borrowers was to lock in rates now for three years-plus.
Those willing to bet on rates dropping a bit could fix parts of their mortgages at shorter durations, he said.
After the Reserve Bank’s last OCR review in November, Westpac’s former treasurer Jim Reardon, now a consultant, voiced a similar view to Patten.
He believed banks could absorb spikes in demand from borrowers wishing to fix their mortgages for longer durations.
Reardon noted they didn’t have to write off as much bad debt as they provisioned for in the past year, their margins had been comfortable, and the Reserve Bank was likely to reduce the amount (or change the mix) of the capital they have to hold in the future.
The outcome of the Reserve Bank’s capital review will be announced shortly.
Reardon also believed banks had to price aggressively to win business.
On Monday Kiwibank will lift its longer-term term deposit rates – not its mortgage rates – by 30 basis points.
Reardon believed the economy needed interest rates to stay low for longer to support it bouncing back.
Commentators worried about the impact of rising mortgage rates were disappointed when Reserve Bank Governor Dr Anna Breman declined the opportunity to try to talk the market down when she spoke to journalists on Wednesday.
She said she would monitor the impact of tightening financial conditions, stressing “there is no pre-set course for monetary policy”.
Patten had some empathy for Breman’s cautiousness.
She only took up the role on December 1, and as of Wednesday hadn’t met all the other Monetary Policy Committee members, who are collectively responsible for setting monetary policy.
Breman said she would keep a close eye on new data, including gross domestic product (GDP) figures and the consumers price index (CPI) update due out before the February OCR review.
She will have an opportunity to comment on the market again when she does an interview with the Herald next week.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
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