Interest rates are at historic lows with many economists picking they will begin to rise in the short to medium term, but independent economist Tony Alexander thinks the situation would track "fairly cautiously" when it came to the Reserve Bank.
"The central banks around the world have been at pains in the past three to four weeks to emphasise they don't plan raising their overnight monetary policy interest rates for up to three years or so, but before then, the medium-long term interest rates - government bond yields, fixed interest rates - they're likely to rise but again it's not going to be a rapid thing," Alexander told Nine to Noon.
"Precisely because ... even a 1 percent rise would cause quite an impact in the markets."
Longer term interest rates in wholesale markets reflected expectations for where monetary policy would go, Alexander said.
"With the world economy looking like it is going to perform a heck of a lot better than anyone was reasonably expecting, people are looking at inflation picking up, so if you go back to October last year, since then the cost to a bank in New Zealand of borrowing money at a fixed interest rate for one year has increased about 0.3 percent. For the three-year term it has increased about 0.8 percent and for five-year fixed-rate lending, the cost of that money to the bank has gone up by about 1-1.1 percent.
"So already their margins are under pressure, especially for the longer-term interest rates, but hardly anybody is borrowing beyond the one year term given the low rate of 2.29 percent, so the trigger for banks actually raising those longer term fixed rates which are at record lows is probably going to be as soon as you and I get a bit scared and start borrowing at the three-five year term, then they will raise those rates."
But since fixed-term mortgage rates appeared in New Zealand in the early 1990s, Kiwis had tended to only fix for one or two years - at most three, Alexander said.
"We tend to like the flexibility in New Zealand, it seems."
About 90 percent of borrowers were at present locking in at the one-year fixed term rate, he said.
"That will change slowly over time but even at the end of all this, you're only going to have a very small proportion of people who will take the security of the five-year rate."
Alexander expected that within a year's time, the one-year fixed term rate would be at or only just above its current level.
"Our Reserve Bank probably isn't going to raise its Official Cash Rate until maybe the middle-second half of next year... I think people who are determined to keep borrowing short term will still be finding that interest rate relatively low in the next 12 to 18 months."
Alexander said the positive thing was that for anyone who had gone to a bank to borrow money recently, the banks had added a buffer of 2-3 percent to their ability to service the loan.
"So even when the rates rise, there should still be some good buffers for the average borrowers out there to handle it without a large impact on the economy or on the housing market."
Asked about the risks faced and by whom, Alexander said: "You have to back about a year ago when central banks facing the global pandemic, they made an explicit decision which they are still affirming now, and basically what they said is whenever they are looking ahead to the economy, inflation, they make a decision: Do they keep interest rates maybe a bit too high for a bit too long and risk crunching economies and their inflation a bit too much, or, do they take the risk that they are keeping interest rates too low for too long printing too much money and overstimulating their economies and inflation eventually down the track.
"And they made the decision 12 months ago to go for that second risk."
Alexander said that in 2022 or 2023 there was a risk of interest rates rising "a bit more than I or any others will forecast for you".
When managing mortgage rates, people needed to think in terms of structuring interest rate exposure so you have time to adjust to any potential shocks that come along, he said.
"The best you can hope to do is lengthen the period of time over which you can adjust to a shock. There are many borrowers who will religiously roll over a portion of their mortage every year. They'll have some at one, some at three, some at five."
Managing interest rate risk was more important than minimising interest rate cost, Alexander said.