ASB drops 5-year mortgage rate lower than 1-year in first sign interest rate hikes may soon slow

A major New Zealand bank is now offering a lower rate for a five-year mortgage than its one-year rate.

In an unusual move, ASB has made several changes to its interest rate offerings for the start of 2023 bumping its short-term rates up while dropping the longer-term options. 

The bank has added 34 basis points to its six-month fixed rate taking it to 6.84 percent. It's the same as its one-year fixed rate which increased 30 basis points also to 6.84 percent. 

The bank's 18-month and two-year fixed rates also increased 15 and five basis points respectively, taking both to 6.79 percent. 

But the bank cut its three-year mortgage rate, down 15 basis points, along with its four and five-year rates down 40 and 50 basis points respectively. 

The changes bring the three-year rate to 6.69 percent, its four-year rate to 6.59 percent and its five-year rate to 6.49 percent. 

ASB is the only major New Zealand bank to offer a lower rate for its five-year option compared with its six-month option. 

Infometrics principal economist Brad Olsen said the increases to the short-term rates are likely in anticipation of the Reserve Bank of New Zealand (RBNZ) increasing the Official Cash Rate in February to dampen inflation. 

"There's still an expectation, and a pretty strong expectation, the Reserve Bank is going to have to continue to raise interest rates in the first few months of this year," Olsen said. 

"Inflation is still likely to be hot, food price inflation is running at a 32-year high, rents are elevated… fuel has come back but we're still in the grips of high inflation."

But he said across the world, particularly in the United States, inflation looks like it may have peaked, which could mean while the OCR will increase in the short term, it might start coming down in the longer term. Olsen added the increasing likelihood of a recession will also impact whether the OCR continues to rise. 

"In my mind, that increase to the one-year fixed term just reflects the fact we are likely to see interest rates rise. The cuts towards the longer term, I think reflect that we've seen wholesale bond rates reduce quite a bit already in 2023. 

"And of course, if wholesale bonds are getting cheaper then the banks themselves aren't having to pay as much for their longer-term lending so they can pass some of that on."

Olsen said households are also increasingly looking at whether they should fix for longer to avoid more mortgage rate hikes. But he said it's unlikely many will be seriously considering the longer-term options. 

"I think what ASB is also likely doing is just making the longer-term rates a bit more attractive. Of course, that's the sort of thing that some borrowers probably won't be all that keen on, particularly if you are looking to see the Reserve Bank overdoing the economic response to bring down inflation, they could need to cut interest rates into 2024 and if you're locked in for four or five years, those caps won't be any good for you," he said. 

The RBNZ is broadly expected to hike interest rates again early this year. In a report on Monday ASB said it's expecting a 75 basis point increase to the OCR in February but it said further hikes will depend on how the economy is tracking.