Interest Rates Intel: Mix, Fix or Float?
The pain of high interest rates is almost certainly coming to an end, and will be a welcome relief for commercial property investors and homeowners alike.
Our Classic Collectives rely on sizeable lending, all of which is on floating rates at present as we patiently await cuts to the Official Cash Rate (OCR). Thankfully New Zealand’s Reserve Bank markedly changed its tone in its last OCR review, noting that interest rates will soon need to be “tempered” as inflation continues to ease.
We feel the time is now right for investors to consider a hedging strategy and whether they wish to take advantage of longer term wholesale rates now or wait for a clearer picture to emerge. Like most things in life, timing is key.
What is the new normal?
The OCR is 5.5% at present but as Westpac’s latest interest rate update points out, the Reserve Bank now estimates a ‘neutral’ OCR will eventually settle at 2.75%. In other words, that is where they expect the OCR will sit when the economy is in balance. Historically, this is lower than previous ‘neutral’ positions have been (it was around 5% in the mid-2000s).
Westpac says the consequence is that future interest rate cycles will likely happen at a lower average level than in the past which reflects what’s happening globally. This is due to a couple of factors – productivity growth is slowing, populations are ageing, inflation is being managed better, and risk premiums are falling.
Should we mix, fix or float?
Ultimately that’s up to the investors within each Collective to decide. Each of our funds will have an AGM in August where interest rates will be a hot topic of discussion. We will present the latest economic data to our investors, and there are a number of important statements to watch out for in the coming weeks. This data will have a significant impact on the timing of OCR cuts.
Markets will be carefully watching the US Federal Reserve’s announcement on 1 August to see if they still plan to start cutting their interest rates in September. The Reserve Bank of Australia has a similar review on 6 August.
Back home, New Zealand’s June quarter unemployment figures will be announced on 7 August, followed by GDP figures on 19 September. Anecdotal evidence suggests these figures could show our economy is even weaker than expected, which could see cuts made at the 9 October OCR review (or less likely) at the Reserve Bank’s mid-August monetary policy statement.
New Zealand’s inflation rate is slowing thanks to falling prices for imported goods (tradeable inflation). Locally-driven price rises (domestic inflation) is still sticky and taking longer to cool off. Inflation for the September quarter is expected to return to the Reserve Bank’s mandated 1%-3% target range. This inflation data is due 17 October and will give the Reserve Bank further confidence it can begin cutting the OCR to bring interest rates down.
Keeping a close watch
Whatever happens, there’s a lot of moving pieces to the puzzle. Rest assured Owen, Dan and the Classic Collectives team are on top of it all. We are personally speaking to banking experts in the coming weeks and analysing all the available data to present to our investors at the upcoming AGMs.
OCR cuts will result in significant savings for all of our Collectives and improve investor yields. It’s really just a question of timing as to when to pull the trigger on a hedging strategy and what that strategy should look like – fix, float or a mix of both.
There’s certainly plenty for everyone to think about. If you have any questions or would like to discuss the current market situation at any time, feel free to get in touch.
EMAIL: Owen.Cooney@classiccollectives.co.nz
PHONE: 027 222 6932
