NZ: Likely seen lows for borrowing rates - BNZ

Kymberly Martin, Senior Market Strategist at BNZ, suggests that we have likely seen lows for NZ borrowing rates as the OCR is now at a cyclical trough of 1.75%, and bank funding costs are rising.

Key Quotes

“The OCR was cut 0.25%, to 1.75%, this week. We expect this is the trough. After a prolonged period at this level we anticipate a gradual rate hiking cycle to begin in H1 2018.”  

“Borrowers can expect a historically low OCR to keep borrowing rates fairly contained for a while longer. But the risk is that floating rates may rise, without any near-term rise in the OCR, if bank funding cost pressures persist. Equally this may put upward pressure on fixed rates.”

“We see short-dated wholesale fixed rates as near ‘fair value’ and likely to be range-bound for a while. However, 3-5-year wholesale rates face continued upward pressure.”

“Even though they have already moved sharply higher due to global and domestic influences, they still likely still offer ‘value’ relative to long-term OCR projections.”

“Furthermore paying fixed rates allows borrowers to lock in the wholesale, credit and funding components of their overall rate.”

“Meanwhile long-dated rates have surged higher in the aftermath of the US elections. We now project a higher range for the months ahead. We do not expect previous lows to be revisited but would suggest considering any notable pull-back within a higher range as a hedging opportunity.”