Interest rates

PHOTO: File image. Photo: 123RF

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.