Swap rates can be volatile, but the rise in recent weeks is notable, as per the graph below from interest.co.nz.
Two-year swap rates over the past year. Graph / interest.co.nz
Markets are worried the high oil price could cause inflation to soar and central banks to lift interest rates in response.
They are also pricing in uncertainty associated with highly indebted countries taking out more debt.
Another factor pushing longer-term mortgage rates up is that retail banks have had to manoeuvre to meet heightened demand for two-year fixed mortgages, as borrowers have scrambled to lock in fixed rates near the trough in this cycle. They spent much of 2025 on floating and shorter-term rates, with the idea of locking in rates for longer terms once they bottomed out.
So, even though the Reserve Bank hasn’t started lifting the Official Cash Rate (OCR), fixed mortgage rates have been rising since late November.
Swap rates could move again after Reserve Bank Governor Anna Breman does a speech on Tuesday to share the Reserve Bank’s thinking on how the conflict could influence the New Zealand economy.
This will set the scene before the Reserve Bank next reviews the OCR on April 8.
If the Reserve Bank considers high oil prices to be transitory, it might stick to the plan it outlined in February to start hiking the OCR at the end of the year.
Because the market is betting on the OCR rising sooner, this position could cause swap rates to drop back – removing some of the upward pressure on fixed mortgage rates.
But if the Reserve Bank raises concerns over high oil prices causing inflation to be more embedded, swap rates might stay where they are, if not rise. This would put upward pressure on fixed mortgage rates.
The Reserve Bank is tasked with ensuring the annual inflation rate stays between 1% and 3% in the medium term.
So, one could argue it is more likely to sit tight for a bit, before reacting to the high oil price.
Looking beyond the here and now is a fraught exercise.
Some economists believe the effects of disruptions to the fuel supply chain will be felt for some time, even if the war ends soon, so inflation is likely to be higher than would otherwise have been the case.
Accordingly, they believe mortgage rates will track higher sooner.
Other economists believe the hit the economy will take from higher oil prices squeezing household budgets, killing confidence, and reducing economic demand will be severe enough to limit inflationary pressures.
Consequently, they believe the Reserve Bank will be able to take its time lifting the OCR from the stimulatory level it’s at.
Taking a step back, it is clear the trough in this interest rate cycle has passed.
Mortgage rates were always going to rise this year.
The war has raised the question of whether rates will rise more quickly in the next few months than would otherwise have been the case.
What happens to mortgage rates next is anyone’s guess.
The Reserve Bank has a tough task on its hands keeping inflation in check in the medium term when it can’t control oil prices and the policy it sets now will take about 18 months to take effect.
As for the Government, its resolve to keep any (potentially inflationary) cost-of-living support it provides “temporary, targeted, and timely” will be tested as the election looms.
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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