NZ Interest Rates Forecast…
Will Interest Rates Go Up or Down?

NZ Interest Rates Forecast

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.

Page updated 28 November 2019

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, Sweden and Japan range from -0.75% to -0.1%, the Eurozone (Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain) rate is 0% and Denmark and Israel are near zero at 0.05% and 0.25% respectively (Global-Rates). Australia is at 0.75% and New Zealand 1.0% (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. Most banks have fixed rates under 3.5% now.
  • With the primary driver of interest rates being inflation, and inflation 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. Olly says all predictions expire at midnight 😉

Will mortgage interest rates go up in 2020?

Some people worry about investing in property because they think mortgage interest rates could go up in 2020. 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 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, with best predictions being for mortgage interest rates to go even lower in 2020.

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%. 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.

The Reserve Bank of Australia (RBA) is expected 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% but it’s already at 0.75%, so maybe an eventual rate of 0% is more likely?

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 have been trading in a narrow band between 1.5% and 1.9% since 1 August 2019, as you can see in this chart…

US 10-year Treasury Bond Yields April 1990 (9.09%) to 26 November 2019 (1.74%)
US 10-year Treasury Bond Yields April 1990 (9.09%) to 26 November 2019 (1.74%)

(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%
  • Denmark: -0.75%
  • Sweden: -0.25%
  • Japan: -0.1%
  • Eurozone: 0%
  • United Kingdom: 0.75%
  • Australia: 0.75%
  • New Zealand: 1.0%

(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 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.

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 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.

Term deposit rates

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 October 2019, a time span of nearly 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, that’s nearly 12 years of declining term deposit interest rates. The interest rate train has no brakes and is on a gentle downhill slope. Don’t expect it to stop any time soon.

1-Year Term Deposit Rates NZ from Jan 2008 to Oct 2019
1-year term deposit rates in NZ from Jan 2008 to Oct 2019

Term deposit rates as at 28 November 2019

The following list details 1-year term deposit rates in New Zealand for the major NZ trading banks, as at 28 November 2019…

    • ANZ: 2.65%
    • ASB: 2.55%
    • BNZ: 2.6%
    • Kiwibank: 2.75%
    • TSB: 2.6%
    • Westpac: 2.6%

After-tax retirement income

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 2.6% 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 $21,450 p.a.

In the current low-interest rate environment, is it any wonder people are chasing higher-yield investments?

If you’re looking for somewhere safe to park your money and earn 6% p.a. PLUS capital gains, you should consider our Provincia Property Fund.

In a nutshell…

We (a) teach new investors how to invest in commercial property, and (b) work with existing investors who want to improve rents, update or reorganise leases, and generally improve their commercial property investment portfolios.