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 for some time to come.

Page updated 26 June 2020

Contents

1. Executive Summary
2. Will mortgage interest rates go up in 2021?
3. Central bank interest rates around the world
4. Why are interest rates so low?
5. Can the Reserve Bank drive interests rates back up to high levels again?
6. Fixed-term mortgage interest rates today
7. Term deposit interest rates
8. Term deposit interest rates today
9. After-tax retirement income

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%, Great Britain and Israel are at 0.1%, and the following countries are all at 0.25% – Australia, 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. Most banks have fixed rates under 3.5% now, and special rates for low LVR loans (<80%) of less than 3%.
  • With the primary driver of interest rates being inflation, which has remained stubbornly below target since the 2008-08 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. Olly says all predictions expire at midnight 😉

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2. Will mortgage interest rates go up in 2021?

Some people worry about investing in property because they think mortgage interest rates could go up in 2021. 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 mortgage interest rates dropping even further throughout the first half of 2020 and best predictions for them to head lower still.

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.

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.

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 (9 June 2020) at 0.25%, so maybe an eventual rate of 0% is possible?

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)

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 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%,” 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.

3. Central bank interest rates around the world

  • Switzerland: -0.75%
  • Japan: -0.1%
  • Eurozone: 0%
  • Sweden: 0%
  • Norway: 0%
  • Denmark: 0.05%
  • United Kingdom: 0.1%
  • Israel: 0.1%
  • Australia: 0.25%
  • 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. 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.

5. 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.

6. 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 as at 12 June 2020…

Fixed Mortgage Interest Rates
(below 80% LVR, as at 12 June 2020)
1 yr 2 yr 3 yr 4 yr 5 yr
ANZ 2.65%↓ 2.75%↓ 3.35% 4.15%↓ 4.25%↓
ASB 2.85% 2.69% 3.35% 3.45% 3.55%
BNZ 2.79% 2.69% 2.99% 2.99% 2.99%
Kiwibank 2.65% 2.79% 3.25% 3.45% 3.55%
TSB 2.65%↓ 2.69% 2.79%↓ 2.99%↓ 2.99%↓
Westpac 2.79% 2.69% 2.79% 2.99% 2.99%

To underscore how much mortgage interest rates have dropped, in May 2017 the average 2-year 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%. Today it is 2.78%.

7. Term deposit interest 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 in NZ from January 2008 to April 2020
1-year term deposit rates in NZ from January 2008 to April 2020

8. Term deposit rates today

The following list details 1-year term deposit rates in New Zealand for the major NZ trading banks, as at 26 June 2020

    • ANZ: 1.7% (down from 2.1% four weeks ago)
    • ASB: 1.6% (down from 2.25% five weeks ago)
    • BNZ: 1.85% (down from 2.4% five weeks ago)
    • Kiwibank: 1.8% (down from 2.3% five weeks ago)
    • TSB: 1.7% (down from 2.4% five weeks ago)
    • Westpac: 1.75% (down from 2.2% four weeks ago)

We are currently in the early stages of a 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 to aggressively compete for deposits is not strong. As the recession bites, expect term deposit rates to go lower still.

9. 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 the current highest 1-year rate of 1.85% 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 $15,468 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 secure to park your money and earn 6% p.a. PLUS capital gains, you should consider our Provincia Property Fund.

Earn 6% with Provincia defensive industrial property fund

Here’s how investors looking for a secure 6% p.a. projected pre-tax cash return can create a reliable passive income.

Our conservative investment strategy has resulted in Provincia Property Fund paying investors a reliable 6% p.a. dividend ever since the fund was established in 2017. The most recent dividend was paid in April 2020 during Covid-19 lockdown 💵

Dividends are paid quarterly and, as a PIE fund, it is tax effective too. You benefit from your share of Provincia’s tax deductions (e.g. depreciation), which means less of your dividend is taken by IRD than many other types of investments (e.g. term deposits) 😉

Provincia Property Fund is only available to wholesale and eligible investors.

Minimum investment $50k 💵

Maximum (to date) $2 million 💰

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.