Interest rates expected to rise at a much faster pace

Last week most of the major banks increased their long-term interest rates as wholesale rates have been rising.

The rising wholesale rates have reduced bank margins for fixed rate lending.

“It looks like the five-year rate which previously sat around 5.29% is going back to sit 0.1% to 0.2% above the 5.49% level it was at up until about three weeks ago, Alexander says. “That is, 5.59-5.69% or thereabouts versus 5.29% last week.”

He says not that anyone is really borrowing fixed for five years.

“The opportunity to pick up a good rate and gain excellent insulation against the upside risks for inflation I’ve been highlighting since August 2024 has now gone.

Alexander’s survey of mortgage advisers shows the three-year rate gained in popularity last month, while the two-year rate also remained favoured by borrowers.

“It looks like the three-year rate is settling now near 5.29% from 4.99%. The two-year rate seems to be settling for now near 4.89% from 4.69% though a wide range on offer exists.”

He says he remains concerned about underlying high inflation in New Zealand and that the RBNZ has underestimated the inflation risk.

“Now, with oil prices having soared businesses are presented with a golden opportunity to raise their prices to not only cover current fuel and plastics-related cost increases but recoup some earlier lost margin as well.”

For the moment, Alexander says the evidence of widespread selling price increases is muted.

Last week the net proportion of businesses replying to his monthly survey who said they would raise their selling prices has eased to 4% from 8% last month. He expects that to change.

“What is happening is forecasters are taking the opportunity provided by this inflationary spike to adjust inflation predictions upward which they might have been wanting to do anyway.

“The environment we all operate in seems to get more uncertain as each month goes by and I don’t envy a central bank trying to plot a monetary policy course through this.”

The Reserve Bank of Australia has just raised its cash rate for the second time this year after cutting as recently as August last year.

Alexander says the evidence to date is that central banks are biased towards driving high increases in the household cost of living (another way of describing inflation), and no longer understand how economies work.

“New Zealand’s inflation rate, for instance, bottomed out most recently at 2.2% in the December quarter of 2024. 

“In April 2025 Statistics NZ figures showed the rate had lifted to 2.5%. So, in May the RBNZ cut the cash rate from 3.5% to 3.25%. Then in July Stats NZ said the inflation rate had risen further to 2.7%, so the RBNZ cut the cash rate in August to 3%. In October Stats NZ figures revealed inflation had risen again to 3%. Twelve days earlier the RBNZ had cut our cash rate 0.5% to 2.5%. Knowing this rise in inflation they cut another 0.25% in November.

Inflation has now climbed to 3.1%.

“And these people still get paid.”

At the most recent RBNZ policy committee meeting one member said no signal about a rise in the cash rate from 2.25% should be given in case it made businesses think the economy would be strong and they could increase their prices. “Presumably then to fight inflationary urges they should warn of rate cuts,” Alexander says.

“The price for this performance displayed by the country’s central bankers is paid not by them but by Kiwi households who must live through strong increases in their cost of living. And now a new inflationary shock is running through the system.

“Guess who will still get paid?”

He says given the high uncertainty in the economy, geopolitics, supply chains, and monetary policy implementation, mortgage borrowers need to focus a lot less on trying to be clever to minimise debt cost and instead focus on debt minimisation and certainty of interest expense outflows.

“That means being prepared to pay a premium for fixing long rather than riding the volatile short end (one year) through all that will come our way.”