ASB raises two-year mortgage rates above 7 pct, leaving 'quite a gap' between competitors

ASB has become the only big retail bank in Aotearoa charging more than 7 percent for its two-year fixed mortgages - and other banks could follow, says a leading economist. 

Banks have continued to hike their home loan rates, despite the Reserve Bank/Te Pūtea Matua having stopped its increases to the official cash rate (OCR) since May. 

Brad Olsen, Infometrics chief executive and principal economist, told Newshub ASB's decision reflects the fact retail banks are facing higher international borrowing costs. 

"And those higher costs are being passed on to consumers," he said.

Other banks may follow ASB's lead, Olsen said - but that depends on whether they want to protect their profit margins at the expense of attracting more customers. 

"They might try to absorb some of the increased wholesale rates increases to keep their mortgage rates competitive." 

But there's "quite a gap" between the one-year fixed rates among the bigger banks, he added.

Brad Olsen.
Brad Olsen. Photo credit: AM

What are the big banks doing?

Kiwibank currently has the lowest one-year fixed rate among the big banks, while ASB has the highest. 

ASB increased a range of its mortgage rates, including its two-year fixed rate which went up to 7.05 percent - the highest in 14 years. ASB also hiked its one-year, four-year and five-year rates by between 0.16 and 0.20 percent.

However the bank doesn't have "special" rates unlike others. 

The Australian-owned bank reported in August its profit for the year ended June was $1.5 billion - up 9 percent on the previous year. 

David Cunningham, chief executive of mortgage brokers Squirrel, said the Reserve Bank has already signalled twice Aotearoa has likely hit the peak of the interest rate cycle. 

He said longer-term mortgage rates, like the five-years being lower than the short-term rates suggests markets expect the OCR to start falling 2024. 

But banks have been slow to increase their term deposit rates for savers, which has helped increase their profit margins as a result. 

Banks' retail profit margins are sitting at about 2.4 percent, a record high, after rising sharply since early last year.

Photo credit: Getty Images

One-year fixed-term home loan rates

  • Kiwibank - 6.99 pct
  • BNZ - 7.19 pct 
  • Westpac - 7.25 pct
  • ANZ - 7.25 pct
  • ASB - 7.45 pct

Two-year fixed-term home loan rates

  • BNZ - 6.85 pct
  • Kiwibank - 6.89 pct
  • Westpac - 6.89 pct
  • ANZ - 6.99 pct
  • ASB - 7.05 pct

Reserve Bank's moves and the market

The Reserve Bank / Te Pūtea Matua started hiking the OCR in October 2021 to try and tame inflation. 

Retail banks then started to hike their interest rates too. 

In August, the Reserve Bank/Te Pūtea Matua raised its peak OCR forecast - predicting a 20 to 40 percent chance of a further increase. 

"It is awake to the idea that it might have to raise rates again if inflation doesn’t cool as expected," Olsen said. 

Infometrics' main forecast is for the OCR to remain on hold until the second half of 2024, he added. 

And even though the OCR hasn't changed in months, Olsen said 10-year New Zealand bond rates have gone up 0.28 percent, which is "in line with rising bond rates across the world". 

At the same time, concerns are growing worldwide about persistent inflation and, as a result, many countries' central banks have raised interest rates. 

Stronger-than-expected activity, especially in the US, "has increased the chance that the US Federal Reserve will need to keep increasing interest rates, and for longer", Olsen told Newshub. 

Adrian Orr.
Reserve Bank Governor Adrian Orr. Photo credit: Getty Images

Inflation and other factors

Factors including domestic food prices, affected by weather events, and higher demand than supply across the economy have driven up domestic inflation, Olsen said. 

OPEC+ nations have been cutting production of crude oil to drive higher prices and profits, and they've agreed to keep production lower into next year. 

In August, Saudi Arabia pledged to cut its output by one million barrels a day, while Russia later announced it would cut output by 300,000 barrels a day. 

"Lower fuel prices over the first half of 2023 helped tame overseas-based (tradeable) inflation, but the reintroduction of the full fuel tax, plus higher global fuel prices, will provide a boost to inflation in the September 2023 quarter," Olsen told Newshub. 

The price of Brent crude, which influences global fuel prices, has risen to US$88.20 a barrel - the highest in nearly a year. 

It comes after the New Zealand Government's 25-cent discount on fuel excise ended on June 30. 

And the economic and property downturn in China is starting to bite here in Aotearoa too. 

"China’s more sluggish economic growth is a challenge for the New Zealand economy and that's already being seen in the primary sector, with lower revenue for farmers etc. now expected," said Olsen. 

This week, consumer website Canstar released data showing comparisons of mortgage rates and there were a few changes. 

Back in August 2021, the average one-year fixed mortgage rate was 2.58 percent - now it's 7.26 percent. 

Canstar's Jose George said it's interesting banks are changing their mortgages rates to get in a comfortable position if the OCR did rise. 

"Kiwis facing big hikes in mortgage payments may want to try and negotiate a better deal, or look around the market." 

He said some banks offer cashbacks or other incentives to entice new customers, like lower mortgage rates. 

With high inflation, weaker economic growth, but at the same time as record-low unemplyoment and a turning housing market, it could make for an interesting year ahead for banks and their customers.