Mortgage Rates Will Hold Steady

Cut unlikely to hit mortgages


Last updated 05:00 01/10/2011

New Zealand’s credit rating was knocked down a notch by two agencies, just a day after the Government hauled in a massive $1 billion from investors, showing there is no lack of appetite to put money in New Zealand.

Both Fitch and Standard & Poor’s cut New Zealand’s rating from AA-plus to AA yesterday, with the biggest impact seen in the dollar, which fell about US1 cent. The Kiwi dollar ended at US76.76 cents late yesterday, down from as high as US78.28 cents the previous day. The dollar is back to levels last seen in April.

A downgrade means New Zealand is seen as more risky, and in theory means higher longer term interest rates to compensate for the risk. Some economists said the downgrade could see longer term rates rise slightly, but it would have little impact on short term or floating rates.

International borrowing costs could rise by 5 to 10 basis points as a result of the downgrade, Deutsche Bank said, but that would be more for long-term borrowing, rather the floating rates where most people borrowed at present.

However, on Thursday, the government’s Debt Management Office raised a massive $1b in one of the biggest bond tenders this year, showing there was no lack of interest in New Zealand.

Economists say the Government had easily borrowed money internationally this year.

Bank of New Zealand chief economist Tony Alexander said in theory a credit rating downgrade meant slightly higher interest rates.

But the impact of the downgrade was likely to be “lost in the wash” for mortgage interest rates, with downward pressure on global interest rates.

The five-year swap rate, an indicator of long-term mortgage rates, is about 3.70 per cent, down from about 4.56 per cent in early August. So that recent fall, driven by international events, would cap any rise in longer term rates in New Zealand, as a result of the credit downgrade, ASB Bank said.

Longer term borrowing rates reflected what was happening overseas, while short-term rates were influenced by the Reserve Bank here.

BNZ’s Alexander doubted it would lift rates any time soon.

New Zealand had no history of default and the government had run surpluses for many years before the recent run of deficits.

At AA, New Zealand’s rating remained high, with a low level of government debt by world standards.

“There is not much the government can do to alter the credit rating outlook. It is up to the private sector and household to build up financial assets and get debt down,” Alexander said.

Alexander doubted the credit downgrade would see the Kiwi dollar fall much further, when internationally other countries were being downgraded.

How does nz rate?

Fitch rating for NZ: AA – a low risk of default New Zealand’s rating by Fitch remains near the top of the international tables, close to Australia’s AA-plus and well above the basket cases of Europe such as Greece on CCC, or Portugal on BBB minus.

Anything above BBB is “investment grade” and below that is “speculative” down to a D rating. AA means there is “a very low default risk”, that is, little risk of not paying debts as they fall due, while at CCC default is a “real possibility”, with single C meaning that a default is about to happen.

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