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Tony Alexander forecasts that eventually, the Reserve Bank will yield on interest rates.

Updated: Jan 19

Despite the decrease in wholesale borrowing costs, homeowners are not experiencing the advantages.

Homeowners eagerly await a decline in interest rates, but the Reserve Bank remains concerned about inflation. Photo / Getty Images

According to the analysis from Tony Alexander: Recent weeks have seen minor cuts in bank mortgage rates in response to a decline in wholesale borrowing costs. For example, a fixed-rate loan for two years that previously cost 5.65% now hovers around 4.7%, a nearly one percentage point decrease. In mid-October, the top fixed mortgage rate was 6.99%, now slightly lower at 6.89%. Banks' profit margins for fixed-rate lending have expanded from 1.35% to approximately 2.2%, compared to the two-year average of 1.4%.

Several reasons explain why banks haven't passed on these cost reductions. Some fixed-rate lending relies on term deposits, which haven't dropped as rapidly as wholesale borrowing. Additionally, constrained profit margins prompt banks to catch up on lost profits.

Independent economist Tony Alexander: "We have plenty of indicators in hand telling us that the path for inflation now is down. But the speed of decline is a pure guessing game." Photo / Fiona Goodall

Local wholesale borrowing costs, influenced by U.S. term borrowing rates, haven't led to significant mortgage rate cuts in New Zealand. The Reserve Bank, concerned about inflation at 5.6%, explicitly communicated its reluctance to allow offshore rate falls to impact New Zealand lending rates. The Reserve Bank anticipates a decline in inflation but is uncertain about the speed.

Businesses may soon experience a slowdown in wage growth despite an increased ability to source labour. While household costs rise, including local authority rates, insurance, and construction expenses, the Reserve Bank insists on avoiding significant mortgage rate reductions due to global concerns like oil prices and supply chain disruptions.

While the Reserve Bank may eventually relent, it could be months away. Until then, expect minor downward adjustments in mortgage rates, with more substantial reductions potentially around the middle of the year.

According to the article from Stuff on 19 Jan 2024, Westpac has reduced the interest rate charged on two of its home loan terms.

Its special two-year rate drops by 10 basis points to 6.89% and its special 18-month rate drops by four basis points, to 7.15%.

Standard rates fall by the same amount, to 7.49% and 7.75%, respectively.

- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at

Article Source:

Tony Alexander. (17 Jan 2024). Tony Alexander: At some point the Reserve Bank will capitulate on interest rates.

Susan Edmunds. (19 Jan 2024). Westpac tweaks home loan rates.

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