The Current Outlook For Interest Rates

Apparently, the average interest rate, going back to Egyptian days, is below 5%, and that all the massive spikes in interest rates since 1900 have been due to massive population growth spikes. World population growth rates are slowing and are not expected to spike again, so if you believe that, you can safely forecast interest rates to remain below 5% for the rest of our lives.

I’ve spent most of my life living in New Zealand and I’ve experienced interest rates ramping up to 8% plus during property booms. So, when the property market started taking off in 2011 I regularly recommended people think about fixing, as I thought we were likely to see interest rate rises. I was wrong every time. Now, I prefer to just talk about the following drivers.

Capital adequacy

If your banker hasn’t dropped capital adequacy costs into conversation yet, they’re probably not following recommendations of the hierarchy. It is probably inevitable that the Reserve Bank is going to demand the banks hold greater levels of capital to reduce risk in the event of a financial disaster. All the banks are telling their customers that it will result in increased costs to them, and therefore they will have to increase interest rates. Whether or not their costs will increase (some argue it won’t) is a moot point. If they all sing from the same song sheet then they’ll be able to increase rates. But that is the key point – will they all follow suit? It’s still a competitive environment, and all it would take is for one bank to decide they want to grab market share, and they’ll go to market with sharp rates.

Official cash rate

There seems to be nothing on the horizon that is putting pressure on the Reserve Bank to lift the OCR. In fact, probably the opposite. The Australian Reserve Bank recently dropped rates.

Property Prices

REINZ results for February show that sales volumes in Auckland are down considerably on the previous year and that Auckland prices aren’t going up – though they are elsewhere in the country. So, overall the Reserve Bank will be happy that their LVR measures have done their job. The market has cooled – job done – no need to hike the OCR.

In my opinion, the drivers are not pointing to interest rates ramping up quickly. Just keep an eye on capital adequacy and what the banks are saying.

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