How likely are interest rates to go up in the near future? Here’s why we predict a NZ interest rates forecast of continued low rates…
Page updated 22 January 2021
- Executive Summary
- Will mortgage interest rates go up in 2021 or 2022?
- Central bank interest rates around the world
- Why are interest rates so low?
- Can the Reserve Bank drive interests rates back up to high levels again?
- Fixed-term mortgage interest rates today
- Term deposit interest rates today
- After-tax retirement income today
1. NZ interest rates forecast: Executive Summary
- Low interest rates are not a short-term aberration, but part of a long-term trend says Ben Bernanke, ex-Chair of the US Federal Reserve.
- The Reserve Bank of New Zealand influences interest rates within a small band, but has less control over interest rates than many imagine.
- If the Reserve Bank drove interest rates artificially high, the economy would slow, leading to recession. Not going to happen.
- If they drove interest rates artificially low, the economy would overheat, leading to an inflationary bubble. Not going to happen.
- Instead, they dance in the middle, tweaking rates up or down a little within a narrow band.
- Interest rates are primarily driven by inflation. Where inflation goes, interest rates follow.
- Today’s low bond yields simply reflect economists’ and investors’ expectations that inflation will remain low.
- Globalisation, offshore manufacturing and increased competition are keeping prices, and therefore inflation, down.
- With inflation lacking, markets are pricing out inflation and yields are falling as a result.
- Central bank interest rates in Switzerland are -0.75%, Japan is -0.1%, Sweden, Norway and the Eurozone (Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain) are all at 0%, Denmark is near zero at 0.05%, Australia, England, Israel and Poland are at 0.1%, and the following countries are all at 0.25% – Canada, Czech Republic, New Zealand and the United States (Global-Rates).
- Apart from a few odd blips, our NZ interest rates forecast is for interest rates to remain near zero for quite some time.
- Where interest rates go, mortgage rates follow. All major banks have fixed rates under 3% now, with special rates for low LVR loans (<80%) as low as 2.49%.
- With the primary driver of interest rates being inflation, which has remained stubbornly below target since the 2008-09 GFC and is predicted to remain low for quite some time…
- In our opinion, you’re more likely to see leprechauns dancing in your garden than a return to high mortgage rates in the foreseeable future.
- N.B. All predictions expire at midnight 😉
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2. NZ interest rates forecast: Will mortgage interest rates go up in 2021 or 2022?
Some people worry about investing in property because they think mortgage interest rates could go up in 2021 or 2022. Some even catastrophise about them shooting up to astronomically high levels.
This is understandable given our memories of high mortgage interest rates in the 80s. In fact, the 10-year bond yield hit 19.2% in May 1985!
But that was 35 years ago and we’re unlikely to see mortgage interest rates doing anything like that any time soon. (Not that we’d be distraught if they did… mortgage interest rates would only be high if inflation was high, in which case the economy would be booming and capital gains would be going through the roof!)
We are in the middle of a long-term trend of low interest rates, and mortgage interest rates dropped even further throughout 2020.
Our best prediction is that we are at or near the bottom of the cycle and that interest rates will remain low for several years.
When they do start trending up, expect a slow creep upwards rather than dramatic changes.
The 10-year government bond yield was 7.6% on 19 January 2000, and has trended down ever since. Between 29 July 2019 and now, it’s never been over 1.5%*, mostly trading between 1% and 1.4%. (*With the exception of 2 days in late March 2020 leading up to the Covid-19 Level-4 lockdown, when it spiked to 1.63%.) In fact…
The 10-year government bond yield sank as low as 0.98% on 16 August 2019, the lowest point in over 30 years, continuing a trend that has prevailed here and around the world as inflation pressures evaporate and evidence of a slowdown in the global economy starts to build.
On 13 May 2020, the day before we moved from Covid-19 Alert Level 3 to Level 2, it fell even lower to 0.49% before recovering back to around the 1% mark in June 2020.
The 10-year government bond yield then began a steady 3-month decline, bottoming out at 0.44% on 28 September 2020. After treading water into November it then began a gradual recovery and now sits at around the 1% mark. You can check the latest data here.
In 2019 the Reserve Bank of Australia (RBA) was predicted to cut its rate up to 3 more times by the end of 2020. Economists at JP Morgan previously predicted the RBA would eventually take the cash rate to 0.5%. At the time of their prediction it was sitting on 1.5% and it is now (6 November 2020) at 0.1%.
And where the Aussies go, we follow.
Yields in the United States and Europe have been falling too. Benchmark US 10-year bonds dipped below 2% in July 2019, and traded in a narrow band between 1.5% and 1.9% from August 2019 to February 2020, as you can see in the chart below. Since March 2020 it’s been lower still, with the benchmark US 10-year bonds trading below 1% ever since. As at 17 September 2020 the rate was 0.69%.
US 10-year Treasury Bond Yields
(Source: Financial Times)
Fed sees interest rates staying near zero through 2022
On 10 June 2020 the US Federal Reserve voted to keep benchmark short-term rates near zero and indicated that’s where they’ll stay as the economy recovers from the coronavirus pandemic.
“We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates,”Fed Chairman Jerome Powell said. “What we’re thinking about is providing support for the economy. We think this is going to take some time.”
In addition to the rates move, the Fed said it would keep buying bonds, targeting $80 billion a month in Treasurys and $40 billion in mortgage-backed securities.
The Fed sees interest rates staying near zero through 2022. The “dot plot” of committee members’ rate expectations shows little dissent about keeping rates anchored through 2022. The committee’s 17 members unanimously saw the near-zero stance holding through 2021, and only two expected that to rise in 2022. No members indicated negative rates, a question that has come up repeatedly for Fed officials during public appearances.
Those of you relying on income from interest bearing deposits, best get used to virtually nil returns. It would not surprise me in the least if we enter a period of negative interest rates where you pay the bank to hold your money. Swiss banks charge 0.75% to those who deposit funds with them. Likewise Japan has adopted negative interest rates of around -0.1%.– Market commentator, March 2020
The following chart vividly illustrates his comments…
Eurozone Bond Yields & Mortgage Interest Rates
Mark Brooks, head of income at NZ Funds, said “Globally, there is a trend where inflation is lacking so markets are pricing out inflation and yields are falling as a result.” On the outlook for interest rates, Brooks said investors would be bracing themselves for the likelihood of still lower term deposit rates.
In our opinion, you’re more likely to see leprechauns in your garden than a return to high interest rates in the foreseeable future.
Ex-BNZ chief economist Tony Alexander said more or less the same thing, albeit less vividly, in his newsletter of 8 October 2020…
Expectations have heightened that interest rates will remain at low levels for many years. Traditional fears of a bounce back in rates to previous cyclical highs have disappeared.
3. NZ interest rates forecast: Central bank interest rates worldwide
- Switzerland: -0.75%
- Japan: -0.1%
- Eurozone: 0%
- Sweden: 0%
- Norway: 0%
- Denmark: 0.05%
- Australia: 0.1%
- England: 0.1%
- Israel: 0.1%
- Poland: 0.1%
- Canada: 0.25%
- Czech Republic: 0.25%
- New Zealand: 0.25%
- United States: 0.25%
(Source: global-rates.com – List of current central bank interest rates)
4. NZ interest rates forecast: Why are interest rates so low?
Ben Bernanke, who served two terms as Chair of the Federal Reserve, wrote…
Low interest rates are not a short-term aberration, but part of a long-term trend. As the figure below shows, 10-year government bond yields in the United States were relatively low in the 1960s, rose to a peak above 15% in 1981, and have been declining ever since. That pattern is partly explained by the rise and fall of inflation, also shown in the figure. All else equal, investors demand higher yields when inflation is high to compensate them for the declining purchasing power of the dollars with which they expect to be repaid.– Ben Bernanke (Source: The Brookings Institution)
If inflation rises, interest rates will follow. But as we all know, we live in a low-inflation environment. Today’s low bond yields simply reflect economists’ and investors’ expectations that inflation will remain low.
5. NZ interest rates forecast: Can the Reserve Bank drive interests rates back up to high levels again?
In a word, No. Here’s Ben Bernanke again…
But what matters most for the economy is the real (inflation-adjusted) interest rate… The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth – not by the Fed.– Ben Bernanke
If the Fed can’t affect US rates, what chance is there that our Reserve Bank could drive NZ interest rates up?
If our Reserve Bank kept interests rates artificially high, the economy would slow and fall into recession. This is because businesses don’t make capital investments when the cost of borrowing set by the Reserve Bank is greater than the potential return on those investments.
Nobody likes a recession, least of all our politicians, so… this scenario will never happen.
Similarly, if the Reserve Bank pushed market rates artificially low, the economy would eventually overheat, leading to inflation – also an unsustainable and undesirable situation.
The bottom line is that the state of the economy, not the Reserve Bank, ultimately determines interest rates. The Reserve Bank influences market rates in the short term, but not in an unconstrained way.
In short, we believe interest rates will continue their march towards zero.
6. NZ interest rates forecast: Fixed-term mortgage interest rates today
This table gives an updated snapshot of the lowest advertised fixed-term mortgage rates on offer from the main retail banks…
Fixed Mortgage Interest Rates
(below 80% LVR, as at 22 January 2021)
|1 yr||2 yr||3 yr||4 yr||5 yr|
To underscore how much mortgage interest rates have dropped, in May 2017 the average 2-year mortgage interest rate was 4.8%. By May 2018 it had dropped to 4.5% and in May 2019 it had dropped even further to 3.95%. By May 2020 it was down to 3.0% and on 27 November 2020 it was sitting at 2.58%, where it remains today. (Source)
7. NZ interest rates forecast: Term deposit interest rates today
As if one needed any more proof, take a look at the following graph of 1-year bank term deposit rates in New Zealand from January 2008 to April 2020, a time span of 12 years.
You can see a huge drop of nearly 5% in 1-year term deposit rates following the GFC, followed by a short-lived 1% bounce back, and then a continuation of the downward trend right through to today.
With the exception of a few small blips along the way, that’s 12 years of declining term deposit interest rates. The interest rate train has no brakes and is running downhill. Don’t expect it to stop any time soon.
1-year Term Deposit Interest Rates in NZ
Term deposit rates today
The following list details 1-year term deposit rates for $10,000+ in New Zealand for the major NZ trading banks, as at 22 January 2021…
- ANZ: 0.8% ↓
- ASB: 0.75% (unchanged since our 17 December 2020 update)
- BNZ: 0.8% (unchanged since our 17 December 2020 update)
- Kiwibank: 0.9% (unchanged since our 17 December 2020 update)
- TSB: 0.8% (unchanged since our 17 December 2020 update)
- Westpac: 0.8% (unchanged since our 17 December 2020 update)
The average 12-month term deposit rate at the beginning of 2019 was 3.36% (source). Current rates are therefore down to one-quarter of 2019’s rate.
We are in a global COVID-19 recession. People are currently being driven by fear and money is flowing into bank accounts. This is not the GFC and banks do not have a funding problem, so the need for banks to aggressively compete for deposits is not strong.
With uncertainty continuing to reign, expect term deposit rates to creep even lower.
On 30 July 2020 ex-BNZ chief economist Tony Alexander said, “Every week brings some new, small, declines in term deposit rates as banks seek to build their interest rate margins to try and offset the losses they know they will eventually book from business failure and debt restructuring associated with this crisis.”
And then on 31 August 2020 ASB Bank said this in their Economic Weekly update…
Our forecasts for term deposit rates and mortgage rates have been slashed.– Mike Jones, ASB Bank economist
We think that an RBNZ scheme to lower the OCR below zero and lend directly to banks, if introduced, would heap downward pressure onto term deposit rates.
They’re already at rock-bottom levels, but we see further downside.
In short, we think term deposit rates could fall below 1% with mortgage rates for some terms below 2%.
How prescient he was. Term deposit interest rates have since fallen to well below 1%. Mortgage interest rates, however, are still in the mid 2% range and at this stage are unlikely to fall below 2%.
8. NZ interest rates forecast: After-tax retirement income today
Let’s assume you are a retiree and your only source of income is the pension and interest on a $1 million term deposit at 0.8% p.a. That puts you on a 17.5% income tax rate.
Your after-tax income from that whopping $1 million term deposit is a pitiful $6,600 p.a.
In the current low-interest rate environment, is it any wonder people are chasing higher-yield investments?
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