Dollar signs elusive

By GREG NINNESS - Sunday Star Times | Sunday, 30 December 2007
LAWRENCE SMITH/Sunday News

Home-owners and exporters have little to look forward to in 2008, with both mortgage interest rates and the exchange rate expected to stay high next year.


"I think one would have to be quite brave to speak too loudly about what fixed mortgage interest rates might do next year," said BNZ chief economist Tony Alexander.

"About four months ago I was saying fixed mortgage rates might come down by 0.5% in 2008. Now I think they may not come down at all and if they do it will be minimal.

"The reason is, while they will remain supported by domestic monetary policy remaining firm, what happens offshore is pure guesswork at the moment."

While the US Federal Reserve could make further cuts to interest rates in that country, strong inflationary pressure in Europe and Australia could see central banks there raising them.

And the outlook for floating rates isn't much better.

Alexander isn't ruling out the possibility that the Reserve Bank will cut wholesale interest rates next year, a move which would flow through to lower floating mortgage rates.

"But if they do, it will not be until really late in the year."

In the meantime, there was already pressure for floating rates to go higher even if the Reserve Bank took no action at all on the interest rate front next year, he said.

Real estate agents will also have little to cheer about next year.

Alexander is picking the number of housing sales to fall from about 100,000 this year, down from a peak of about 120,000 in 2003, to about 75,000 to 80,000 in 2008.

The only bright spot is that unsatisfied demand from first-home buyers and investors looking for bargains should help support housing prices, he said.

Alexander is also cautious about picking where the NZ dollar might be headed next year.

"Ever since the currency got through US65c in 2004 people have been always having to upgrade their forecasts and it is the same now," he said.

"Most forecasters are saying maybe we could hit US80c in the next few months, but we'll finish 2008 lower than we are now. But the risk is that we finish 2008 maybe near to where we are now. The prevalent view is that the NZ dollar will go up in the first half [of 2008] and go down in the second half.

"But to me what it means is a warning to exporters that maybe for the next 12 months they could do some hedging."