Floating home mortgage rates are likely to stay low for even longer, with economists pushing out the Reserve Bank's first move up in rates till late next year, or even into 2014.
But even cheaper one- and two-year fixed mortgage rates could eventually jump sharply if there was a sudden rush from floating rates in an effort to beat a rising tide, economists said.
Annual inflation hit a 13-year low of just 0.8 per cent in figures out yesterday, reflecting a high New Zealand dollar holding down import prices.
The kiwi dipped after the figures came out, falling from almost US81.9c to end just under US81.6c.
Inflation is also being held down by slack demand and "full price phobia" , forcing retailers to discount widely, especially for electronics and more recently second-hand cars.
Unexpectedly low inflation of just 0.3 per cent in the September quarter has raised the probability of an interest rate cut to perhaps 40 per cent, according to Bank of New Zealand. But Westpac economists say a rate cut would probably not be sparked unless the global economy got much worse, or there was a serious slowdown in New Zealand.
Most economists still think new Reserve Bank governor Graeme Wheeler will sit on his hands in his first official one-page statement to the market next week.
Low inflation was helpful for the central bank, but it was future inflation that mattered. That was expected to head back towards 2 per cent next year, in part because of the inflationary impact of a burgeoning housing market and the Canterbury rebuild and the waning impact of a high currency.
Cutting rates now could add fuel to the already booming Auckland and Christchurch property markets. The central bank would also be concerned about the potential for rising construction costs in Canterbury, already running at almost 10 per cent this year, to spread to inflation outside the region economists said.
But for now official rates are expected to stay on hold for at least another year.
About 60 per cent of borrowers are on a floating rate mortgage at present, with rates averaging 5.87 per cent.
Some fixed rates are even cheaper, with some rates for one and two years fixed about 5.25 per cent or less.
Westpac chief economist Dominick Stephens said fixed mortgage rates were so low the housing market would pick up even more in the coming year.
One- and two-year rates were lower than floating because of a "small risk" of large cuts to the OCR if there was a real collapse in the European economy.
"There are a lot of New Zealanders currently floating and looking to fix. If they all opt to fix at once, fixed rates could jump up very rapidly," Stephens said.
So sitting on a floating rate till it was clear interest rates were going to rise "might leave you stranded".
"Trying to beat the market is perhaps not a good idea, but who knows when the market will wake up and realise the importance of the Christchurch rebuild [for inflation]," Stephens said.
ANZ Bank senior economist Mark Smith said official interest rates would remain "lower for longer" with the Reserve Bank keeping rates on hold till 2014.
The central bank had time on its side because of the high proportion of borrowers on a floating rate. That meant any lift in the official cash rate would flow through to borrowing rates for many people quickly, unlike when most were on fixed rates and the impact took time to feed through.
Meanwhile, yesterday's inflation figures showed more discounting, accounting for about 12 per cent of items on sale in the quarter, especially imports benefiting from a high dollar.
Sharp discounting may account for the near 3 per cent fall in second-hand car prices in the September quarter.
Annual inflation: 0.8 per cent (year to September) September quarter inflation: 0.3 per cent
Quarterly rises: Food group: up 1.1 per cent
Tomatoes: up 57 per cent
Lettuce: up 32 per cent
Local authority rates: up 3.6 per cent
House rents: up 0.6 per cent
House insurance: up 17 per cent
Quarterly falls: Second-hand cars: down 2.8 per cent
Domestic air fares: down 7.8 per cent
Fresh milk: down 3.8 per cent
Source – Statistics NZ
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