We’re having a lot of discussions at present with our customers about fixing interest rates given the increase in rates via recent OCR changes plus expectations of further rate increases which are being forecast by most economists plus the RBNZ.
We’re also seeing those expectations being played out in the swap curve, where 5-year swap rates have moved from historical lows of around 0% to a peak of c. 2.8% recently.
This has led to plenty of discussion about the merits of fixing versus floating.
This short article is not about the merits of fixing versus floating (we will outlay some considerations on this topic in an upcoming article), but to highlight a significant discrepancy that we’re seeing between banks at present with their various fixed rates, even when standardised back to the same customer margin.
Take a look at the below graph, which is a data set of four of the main banks depicting the margin above the swap rate for each term of 1-5 years.
Now, its important to note a couple of things here:
- This is based on a customer base margin of c. 2.5 above a typical BKBM for illustrative purposes only. We observe plenty of margins both higher and lower than this.
- The colours of the graph are meaningless versus the normal colours of the main banks.
- This is only one data point and only one consideration out of many when discussing and then agreeing on an interest rate risk management strategy.