Spiralling Down
This week, economists having been rubbing their crystal ball and come up with new forecasts. They have forecast that interest rates on deposits could fall below 1% and mortgage rates below 2%. This comes after the reserve banks requirement for banks core funding ratio has been lowered to 50%.
What’s core funding? Money that can be used by banks for lending out to borrowers. Usually, with a one year time frame on it. Things like term deposits make up about 60% of banks core funding. It varies from bank to bank.
The change is quite significant. Previously, the reserve bank had made it compulsory for banks to have a core funding ratio of 75%. This came in after the GFC (Global Financial Crisis) to prevent further credit freezes. During the GFC overseas lenders wanted their money back, usually in a hurry and that’s not good for New Zealand.
So by dropping the core funding rate for banks it means they can borrow directly from the reserve bank or other lenders at much cheaper rates. That is, they are not as motivated to try and attract term deposit holders as they have been. That means we are likely to to see cheaper term deposit rates and cheaper mortgage rates.
So great news for bank mortgage holders. But what if you are a term deposit holder?
According to ASB (1), the promise of extremely low interest rates for years to come will continue to boost asset prices. Previously, they had pessimistically forecast negative housing price falls of 6%, they have revised that to a 3% fall. When you take into account that most negative growth in housing is likely to come from tourism impacted areas, you could argue that the rest of New Zealand might see positive growth. Global equity markets also remain buoyant as investors factor in a lower discount rate (a rate they expect to receive over and above the cash rate) In other words, the interest rates are so rubbish, investors are looking at taking on more risk to get higher returns. This demand for risk is helping fuel asset prices like property and shares.
A word of warning. Take care not to take on risk that you are not being adequately compensated for. There will be alot of deposit takers out there rubbing there hands together, promoting what seem like attractive rates/returns compared to banks. That was the start the the finance company collapse in New Zealand.
ASB did go onto say that they do expect the official cash rate to be lifted in 2 or 3 years time. So this should be taken into account when planning your home loan interest rates and also any term deposit you may be looking at.
Finally, we’ve been working hard on bringing Isbister Partners into a digital world that can operate fully in a lock down situation. We’ve made lots of changes. One that we are most proud of is our online modelling tool for Kiwisaver. In recent research completed by the Financial Services Council it found that 70% of New Zealanders feel under prepared for retirement. The Commission for Financial capability also recently came out with some blunt messages for kiwis(2). We believe this tool may go some way to helping. You can find it here https://www.isbister.co.nz/kiwisaver/
It’s free to use, you can generate a report to download, again for free, in your time, on your couch, your boat or where ever you like to invest in you!! You can even sign up to a Kiwisaver scheme we recommend. All online here Are you one of the 70% of New Zealanders that feel unprepared for retirement? Check out our new online Kiwisaver tool. It’s designed to help you work out where you are at. Click on the link below.
Have a play, you can even download a free report and sign up.
For personalised advice get in touch.
Notes:
1 https://www.asb.co.nz/documents/economic-research/economic-weekly.html Who Borrows Wins
2 https://www.stuff.co.nz/business/money/122542786/kiwis-are-clueless-careless-and-deluded-about-money-and-retirement-savings?fbclid=IwAR0_PoDl2ujFzFLTq0DObW7BuP2VR-n8xFEUKspTtmjAUeqZwEWvpFWNh1Y
Disclaimer: This newsletter is meant to be informative and engaging, hopefully not a cure for insomnia. Please don’t take this as personalised financial advice. Discuss your situation with an Advisor.
- Posted by Isbister
- On September 3, 2020