NZ Interest Rates Forecast…
Will Interest Rates Go Up?

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, marching towards zero.

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 Federal Reserve.
  • The Reserve Bank 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 inflation. That’s not going to happen either.
  • 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, Sweden and Japan range from -0.75% to -0.1%, and the Eurozone rate is 0% (Global-Rates). New Zealand is currently 1.5% (RBNZ).
  • With the odd small blip upwards, our NZ interest rates forecast is for interest rates to continue their march towards zero.
  • Where interest rates go, mortgage rates follow.
  • In our opinion, you’re more likely to see leprechauns than a return to high mortgage rates in the foreseeable future.
  • N.B. Olly says all predictions expire at midnight ๐Ÿ˜‰

Will interest rates go up?

Some people worry about investing in property because they think interest rates could shoot up again. This is understandable given our memories of high interest rates in the 80s. In fact, the 10-year bond yield hit 19.2% in May 1985!

But we’re unlikely to see anything like that any time soon.

We are in the middle of a long-term trend of low interest rates, with best predictions being for them to go even lower.

The 10-year government bond yield sank to 1.71% in May 2019, their lowest point in over 30 years, continuing a trend that has prevailed here and around the world as inflation pressures evaporate and as evidence of a slowdown in the global economy starts to build.

The Reserve Bank of Australia (RBA) is expected to cut its rate 3-4 times over 2019-2020. Economists at JP Morgan have predicted the RBA will eventually take the cash rate to 0.5% (from 1.5% at present).

And where the Aussies go, we follow.

Yields in the United States and Europe have been falling too. Benchmark US 10-year bonds dropped to 2.26% in May 2019. Take a look at this chart of long-term US 10-year treasury bond yields, which shows the 5 June 2019 yield at 2.13%…

US 10-year Treasury Bond Yields

(Source: Financial Times)

“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%,” says Olly Newland.

The following chart vividly illustrates Olly’s comments…

Eurozone bond yields and 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.” Backing up Olly’s thinking on the outlook for interest rates, Brooks said investors would be bracing themselves for the likelihood of still lower term deposit rates.

Central bank interest rates

  • Switzerland: -0.75%
  • Sweden: -0.25%
  • Japan: -0.1%
  • Eurozone: 0%
  • United Kingdom: 0.75%
  • Australia: 1.25%
  • New Zealand: 1.5%

(Source: Wikipedia – List of countries by central bank interest rates)

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.”

Historical inflation and interest rates

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.

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.”

If our Reserve Bank kept interests rates artificially high, the economy would slow (perhaps falling into recession), because capital investments are unattractive when the cost of borrowing set by the Reserve Bank exceeds the potential return on those investments.

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 the real rate of return attainable by savers and investors. The Reserve Bank influences market rates but not in an unconstrained way.

In short, we believe interest rates will continue their march towards zero.

In our opinion, you’re more likely to see leprechauns than a return to high interest rates in the foreseeable future.

Commercial Investors

We mentor investors who are new to commercial property. We also work with commercial property investors who want to improve rentals, update or reorganise leases, or acquire or dispose of properties in order to improve their commercial property investment portfolios.