The Reserve Bank of New Zealand expects to capture more mortgage borrowers than it has in the past when it starts hiking interest rates in the middle of the year.
"Borrowers will no longer be able to ‘slide out the yield curve' to avoid the impact of a policy tightening," Deputy Governor Grant Spencer told investors at the Credit Suisse Asian Investor Conference in Hong Kong.
In January, some $161.7 billion worth of mortgages, or 65% of the total value of lending for residential housing, was on a floating or fixed rate of less than a year, according to central bank data. That's a change from 2007, when the central bank last embarked on a tightening cycle, when almost three-quarters of mortgages were on long-term fixed rates.
"Fixed-term rates on loans/deposits are considerably higher than rates on short-term loans/deposits," Spencer said in speech notes published on the RBNZ website. "This means borrowers are increasingly moving to floating rates or short-term fixed rates which will be quickly affected when monetary policy is tightened."
Economists predict the central bank will start hiking the official cash rate in June from its record-low 2.5% as the economy continues to recover at a subdued pace from its worst recession in 18 years.
New Zealand's economy grew 0.8% in the three months ended December 31, according to government data out yesterday. The market has priced in 178 basis points of rate increases, according to the Overnight Index Swap curve.
Spencer said prior to the global financial crisis, many local borrowers had taken advantage of low long-term rates and managed to avoid the impact of rate hikes that took the OCR up to as high as 8.25% in 2007.
Since the worldwide recession, global markets had "fundamentally changed" with higher funding costs for lenders and prudential regulations requiring larger retail deposit bases and keeping lending rates in check, Spencer said.
Borrowers had also become more conservative in accumulating debt, he said. The central bank is currently investigating other potential policy tools, particularly some of the proposals that have come from the Basel Committee on Banking Supervision.
Still, Spencer said the bank is "wary of any measures that add significant costs to banking intermediation, thereby promoting alternative unregulated and less efficient financial channels."