Interest rate cuts may not see mortgage rates fall
Source: http://stuff.co.nz/blogs/milfordcomment/2008/08/27/interest-rate-cuts-may-not-see-mortgage-rates-fall/Posted on Wednesday, August 27th, 2008 | In New Zealand
There is no guarantee that mortgage rates will fall when Dr Alan Bollard cuts interest rates, as expected, on 11 September. This is because of the international credit crunch which has widened the gap between official central bank interest rates and mortgage rates over the past twelve months.
When the credit crunch began just over a year ago the US Federal Reserve Board’s official federal funds rate was 5.25% and the one year adjustable mortgage rate was 5.84%. The gap between the two was a mere 0.59 percentage points. The Federal Reserve Board dropped its official rate from 5.25% to 4.75% on 18 September and further cuts were implemented until the current rate of 2.00% was established on 30 April.
However mortgage rates have remained stubbornly high and the gap between the official federal funds rate and the one year mortgage rate has risen from 0.59 to 3.29 percentage points over the past twelve months (table below). This is because money is extremely tight and lenders want high returns before they commit funds to the distressed residential housing market.
The Reserve Bank of New Zealand reduced its Official Cash Rate (OCR) on 24 July, from 8.25% to 8.00%, but mortgage rates have been slow to follow with floating mortgage rates staying around 10.90% since the July announcement.
Mortgages are expected to remain high because the New Zealand banks source 39% of their funding from offshore and their refinancing costs will remain high. The gap between official central bank and mortgage interest rates has also widened in Australia and Deputy Governor Ric Battelino recently told Australian banks that they should reduce their rates in line with the Reserve Bank’s moves.
It is extremely difficult for banks, including those operating in New Zealand, to follow this advice because their cost of funding has risen dramatically as a consequence of the international credit crisis.
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Alan Bollard, Australia, Cash Rate, New Zealand, New Zealand, OCR, official central bank, official central bank interest rates, Ric Battelino, The Reserve Bank of New Zealand, US Federal Reserve Board
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