banks flip

2023 is off to a flyer. If you are like me, you will be ready for another holiday as we seemingly got robbed of our summer weather over the break, but there is a lot to talk about before I book my flights so let’s jump in.

In December I mentioned we get our inflation figures out in January. That is tomorrow. But, we have received snapshots of what is going on. The food prices are through the roof. It seems like domestic inflation is only growing stronger so our govt saying things like “it’s a global thing” is getting harder to use as an excuse. Business confidence is at 50yr lows. Businesses have stubbornly high inflation expectations. This is tough, because this means they expect prices to rise but with confidence at all-time lows how can you put prices up? It is all sounding a bit grim.

All this is watered-down versions of the tightrope the RBNZ will be trying to walk. I heard John Key say in an interview the RBNZ are trying to land a Passenger plane on a postage stamp. The RBNZ Governor openly told the media to expect the recession. So, what can we expect for 2023? For those with a keen eye, you would have noticed a few times last year I talked about “Yield curve Inversion” and to watch out for it. Most recently in my December sign-off. Well, we had it happen from the first major bank yesterday.

Yield curve inversion is where the 1yr fixed rate becomes the highest and the 5yr fixed rate becomes the lowest. Traditionally, it has been a great indicator that recession is imminent and interest rate falls are on the near term horizon. Nothing is ever set in stone; for now, only one bank has flipped its rates this way. So the others may or may not follow. My bet would be on all of them flipping at some stage though.

History shows that this is actually a time to take the 1yr rate over the longer term rates even though the value seems to be offered in the long end. The last time this occurred was mid-2008 when the GFC was underway and the Floating rate then dropped from 10% to 6% in the space of 7 months. Many took the attractive 5yr rates and were stuck in the 7% range while rates headed into and below 5%. This isn’t to say that history repeats but it can rhyme.

Something to watch and get a stronger indication that rates are going to fall soon will be the interest rate action after the OCR announcement in Feb. If we get a 50bps or 75bps hike in the OCR and see only the 1yr rate go up and the longer rates stay flat, then the writing is effectively on the wall. That will be the top or peak of this record-breaking interest rate hiking cycle. It means economically there are tough times ahead but the positive will be that the trend of rate hikes is breaking.

Please do reach out if you want to discuss your personal lending/rates/repayments. Or any questions in General. I am more than happy to help and advise.


Mikey Smith – Managing Director, Guardian Smith