Short-term mortgage interests rates are falling but longer-term rates are on the way up.

Only a couple of months ago, expectations were that interest rates in New Zealand were going to keep falling.

Today, however, ASB became the first of New Zealand’s banks to push its five year fixed-interest mortgage rate back up to eight percent. Meanwhile, interest rates for six or twelve month fixed rate mortgages continue for fall.

Fixed Mortgage Rates (2 year) Heading Higher

Shorter-term rates continue to gravitate closer to the Reserve Bank’s headline rate of 2.5%.

Longer-term rates are governed by the cost of raising longer-term money on the international bond markets. And these markets are pricing for higher interest rates.

Governments worldwide, but particularly in the USA and the UK, are set to borrow enormous quantities of money in the coming years.

Professor John Taylor, writing in the Financial Times, illustrated the scale of the borrowing (in the USA):

I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers. The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?

Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth – probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.

The markets are betting that, as a result of unprecedented levels of government borrowing, interest rates will rise. Hence the cost of borrowing money for two years or more is rising, despite the fact that central banks are holding rates at very low levels.

The combination of rising interest rates and rising unemployment is not an ideal setting for an economic recovery in New Zealand or, indeed, elsewhere.