Volatility reigned in New Zealand markets again this week. Financial conditions remain much tighter than the RBNZ was hoping for in the March Monetary Policy Statement, and tightened even further on balance this week – despite an unusual attempt by the RBNZ to talk the market down.
A flurry of activity to lock in fixed-term mortgage rates has pushed interest rates sharply higher in recent weeks. The RBNZ provided the trigger for this in the March MPS by suggesting that the easing cycle is nearing its end, which many borrowers viewed as the signal that fixed rates have bottomed. But the sheer amount of pentup demand for fixed-rate loans – around $15bn, or nearly 10% of all home loans, were moved from fixed to floating rates between September and February – and the lack of natural counterparties in the swap market to absorb these flows, have pushed long-term wholesale rates up by more than 100 basis points. Much of this has been passed on to mortgage rates.
On Wednesday the RBNZ took the unusual step of issuing a press statement, noting that “the rise in longerterm interest rates is unwarranted and inconsistent with the monetary policy outlook”, and that short-term interest rates are projected to remain low for an extended period. Higher long-term rates are mostly a problem to the extent that borrowers lock themselves in at those rates; one of the aims of lowering the OCR is to give borrowers more cash in hand. Short-term rates are substantially cheaper right now, and as the RBNZ notes, will remain so for some time.
Jawboning the market in this way can create fresh problems – something that central banks have already discovered with exchange rates. Words are rarely effective for any length of time, unless backed by action – and in fact swap rates have already returned to the levels seen before the RBNZ’s comment. Moreover, once they start talking, it’s hard to stop – the market will read as much into silence as it does into any statement. The RBNZ ceased making regular comments on monetary conditions in early 1999 partly for this reason.
