Are sub-2% mortgages on the way?

Mortgage rates could fall below 2% as the government and Reserve Bank move to push down borrowing costs, according to a leading fund manager.

Fergus McDonald

Nikko Asset Management's head of bonds and currency Fergus McDonald believes the concerted effort to lower interest rates will lead to even cheaper mortgages in the coming months.

Measures to boost liquidity, such as the Reserve Bank's LSAP programme, will push rates down, McDonald believes.

"I still think there will be a further round of mortgage rate cuts in New Zealand," McDonald said in a webinar. "The banks are awash with cash. They can borrow as much as they want really from the Reserve Bank at 25 basis points. It wouldn't be at all surprising to me if we have mortgage rates at some stage starting with a one."

The fixed income specialist predicts small business would benefit, with many SMEs using their home equity as security for business loans. 

"That will help the SME sector, and that would flow through to small and medium sized enterprises," McDonald added. 

McDonald says long-term interest rates will be dictated by unemployment levels. Unemployment is expected to rise to up to 10%.

He does not believe negative interest rates will be required, as the domestic economy shows signs of life after Covid-19.

The asset manager's comments come as economists predict an expansion of the Reserve Bank's Large Scale Asset Purchases (LSAP) programme, beyond its current cap of $60 billion. 

The RBNZ has hinted quantitative easing is its preferred method of pushing interest rates down, by boosting liquidity.

The increased liquidity would enable banks to lend more freely, and economists believe it will lead to downward pressure on interest rates. 

Last week, Kiwibank chief economist Jarrod Kerr told TMM Online the LSAP programme could double in size. "They haven't finished with LSAP yet, far from it. We think it could double to $120 billion, and we think we will get something towards that in August." 


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