Isbister Partners New Zealand

Interest Rates Rising

Interest Rates Rising

Interest rates rising

From Independent Economist Tony Alexander

On April 13 the Reserve Bank accelerated its pace of monetary policy with a 0.5% rise in the official cash rate. This followed three rises of 0.25% and was motivated by inflation set to soon exceed 7% as a result of supply chain disruptions and Russia’s war against Ukraine.

Some might think that the extra hike in inflation this year might mean interest rates need to go higher than was generally thought last year, and one or two high profile forecasting groups did raise their rate picks.

But my pick for the peak in the official cash rate has been 3% since this time a year ago, and if I’m going to change that pick it will be more likely to reduce it than increase it to the 3.25%+ pencilled in by the Reserve Bank. Why?

Partly it is because the factors which have pushed inflation much higher this year will be unwinding next year and this will depress inflation, just as we have seen with used car prices starting to fall in the United States. Partly though it is because the target of the Reserve Bank when raising interest rates is to encourage households to pull back on their spending.

I can already see such a pullback is underway from my monthly Spending Plans Survey. Add in falling business confidence and investment plans alongside falling house prices and we get a growing list of reasons why the Reserve Bank does not necessarily have to apply particularly painful interest rate restraint this time around.

In fact it pays to remember that the underlying situation for inflation since the Global Financial Crisis has been outcomes far lower than expected, not higher. As the world one day settles down again this dynamic is likely to re-establish itself.

The upshot is that fixed mortgage rates are likely to peak for almost all terms before the end of this year, at levels ranging from 0.5% to 1.0% above levels just before the latest cash rate increase. Come 2024, rates are likely to be edging slightly lower again.

For additional information on the economy, housing market, and interest rates, you can subscribe to Tony’s free weekly Tony’s View publication at www.tonyalexander.nz

Strategies for Managing Rising Interest Rates

From Isbister Partners

Interest rates continue to climb after beginning to increase last year as central banks around the world try to reign in inflation.  This could make some of you a bit nervous as it may be your first experience of a rising rate environment.  We’ve come up with some strategies that may help, outlined below:

  • Ensure your home loan structure is right for you.  There may be opportunities to reduce interest costs and improve your cashflow.
  • Have you been paying off more than the minimum by keeping your payments the same as rates dropped?  If so, you may be able to reduce your repayments to keep the loan over the original term.
  • If your mortgage is coming up for review, discuss splitting your lending with your adviser to hedge your bets.
  • Use an adviser (broker) to scan the market.  At different times, Lenders will try to increase market share by offering well below market rates.
  • Change your repayment habits now.  If your interest rate is currently lower than market rates, work out what they would be.  Then you could either look to increase your repayments now or save the difference into a savings account.  When your mortgage comes up for review you can then look to use the savings to pay a lump sum off your loan.  This way you adjust to the higher interest rates now and you can save some interest at review time.
  • Own rental property?  Use a property manager to ensure you are achieving market rent.  Property managers can help you to earn passive income while taking away the administrative and maintenance tasks of owning a rental property.  A good property manager will review the rent you are receiving against the market on a regular basis.  If you could achieve more, they will recommend you put the rent up.  If you agree they will take care of communicating that with the tenants and make the arrangements.
  • If things are getting pretty tight here are a few ideas to help:
    • Look at taking in a boarder if you have a spare room
    • Review your budget.  Not something we usually like to do, however it’s important to review what you are spending regularly and look at areas where savings can be made.  A budget advisor can help here.
    • Lastly, if things are really tough talk to your lender or advisor about options.  It’s best to be proactive.

Disclaimer:  This newsletter is meant to be informative and engaging, hopefully not a cure for insomnia.  Please don’t take this as personalised financial advice.  Discuss your situation with an Advisor.  This is where I need to say past returns are no guarantee of future returns.

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