Interest rates are likely to stay low this year with the Reserve Bank not raising the cash rate until 2014 but fixed rates rising as US growth improves but worries grow about inflation and financing the US deficit. Nothing has emerged to improve our ability to predict when fixed rates jump up and as was the case in 2009, 2010, 2011, and 2012 there are likely to be some unsustained rate surges which create confusion among borrowers.

The September quarter pace of growth in the economy came in much lower than expected (for the second quarter in a row), the June quarter rise previously reported as 0.6% was revised down to just 0.3%, and a technical recession occurred in the second half of 2010 (subject to further revisions in coming quarters). All of this means that the economy starts its growth path going forward with more spare capacity than had been previously thought and that means downward revisions to predictions of the upward inflation path over the next three years and that in a nutshell means yet again a further strengthening of the case that the Reserve Bank does not start raising the currently 2.5% official cash rate until 2014.

 

However, as we have pointed out for a couple of decades now, one can get large changes in fixed interest rates without the cash rate changing and 2013 could easily see that happening. While an acceleration in the NZ domestic pace of growth will place mild upward pressure on fixed rates as the year progresses and the simple passage of time takes us closer to the next OCR increase, a more substantial factor may well be rising long term interest rates in the United States.

 

Over the past few weeks data releases in the US have generally come in better than expected leading to rising hopes of growth which have been reinforced by the fiscal cliff being avoided. Adding in comments from the Fed. in board minutes that it will probably end debt purchases this year and this has caused medium to long term interest rates to go up and the ten year US government bond yield now sits near 1.9% from 1.72% a month ago.

 

As a result swap rates here in New Zealand have increased about 10 – 15 points above their levels in the middle of December.