Note: Apologises for the lack of action here. If I was any busy I would become a singularity. Regular posting will eventually restart. Now for a post …
Bernard Hickey recommended sticking to floating mortgages for the long haul on Rates blog recently. This is in stark contrast to Tony Alexander’s suggestion that, in a few months, fixing will be the way to go.
Now fundamentally, I think these two authors AGREE on the track for the official cash rate going forward. The difference stems from the expectations for floating and fixed rates. Personally I agree with Tony. Why?
Bernards argument, in my opinion, hits a certain flaw right here:
If, for example, the Reserve Bank starts increasing the Official Cash Rate from its 2.5% to around 5% by the end of next year, then variable rates are expected to rise to around 8-8.5%. Given fixed rates are also expected to rise by a similar amount to around 9-9.5% the choice is clear for those simply looking for the cheapest rate.
This isn’t how floating and fixed rates work per see. The current official cash rate influences interest rates now by providing some opportunity cost in sourcing funds. The future official cash rate influences fixed interest rates now, by changing the opportunity cost of sourcing funds in the future. As a result, the fixed rate depends upon expectations of the OCR in the future, while the floating rate only depends on the OCR now.
Given that everyone expects the OCR to lift appreciably in the coming quarters, it makes sense that the current floating rate is below the fixed rates. However, as the OCR increases floating mortgage rates will lift by a greater amount than fixed rates.
Bernard Hickey is absolutely correct when he says that the world is different, and the make up and structure of interest rates will be different than we have experienced in the past. However, as we move through the upward swing of the economic cycle I would expect fixed rates to become “relatively cheaper” than floating rates in a static sense.