Twelve months ago, the Reserve Bank of New Zealand (RBNZ) kick-started a whole new era of rate rises when it lifted the Official Cash Rate (OCR) for the first time since 2014.
The RBNZ pushed the OCR up 0.25 percentage points in October 2021, from a low of 0.25%, and have been hitting consumers - and inflation - hard in the months since, with the cash rate currently sitting at 3% and on a trajectory to past the 4% mark.
Economists expect the RBNZ to maintain its firm line on inflation - running at a 21-year high of 7.3%, according to the latest CPI figures - and lift the cash rate another 0.5 percentage points to 3.5% on Wednesday.
The chance of rates peaking in November, when the RBNZ releases its last Monetary Policy Statement of the year, is looking unlikely, with most commentators picking further rises beyond the 4% peak they were forecasting earlier this year.
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War, global market instability and a plunge in the New Zealand dollar have all played their part, and homeowners should expect higher mortgage bills as a result.
Kiwibank economists Jarrod Kerr and Jeremy Couchman say an OCR of 4% may not be enough to tame inflation - New Zealand's “public enemy number one” - and warn that more increases could be on the cards next year. “The risk is clearly tilted to even more tightening, if the inflation beast refuses to retreat,” the economists wrote this week.
Two weeks of mayhem on international markets have thrown previous peak OCR expectations out the window. "Basket case" economic policies overseas - we're looking at you, Britain - are likely to hit New Zealand borrowers hard as countries around the world struggle to keep inflation in line.
ANZ chief economist Sharon Zollner believes the OCR will hit a peak of 4.75% next year. The last time homeowners saw a rate that high was 13 years ago, and mortgages were a lot smaller back then.
Infometrics chief forecaster Gareth Kiernan thinks the RBNZ will raise the OCR to 4% before the end of the year and then hit Kiwis with two smaller 0.25 percentage point rises next year.
Kiwis should expect higher fixed and floating mortgage rates as a result. “Some fixed mortgage rates started to come down in July and August, and there were suggestions at the time that maybe rates were close to or even at their peak," he says.
“That felt a bit premature, given what we've seen over the last few weeks. If things go badly, you could well be looking at one year [fixed mortgage] rates pushing up towards 6.5% in the first half of next year.”
That would be higher than last year's test rates, and Kiernan fears that some homeowners who bought at the peak will be heading into default territory.
ANZ chief economist Sharon Zollner thinks the OCR will peak at 4.75%. Photo / Dean Purcell
Zollner believes households can stomach the mortgage rate rises that would flow on from a 4.75% OCR. “The mythical median household is actually well-positioned to cope with the consequences for mortgage rates of an OCR rising to 4.75%. The debt-servicing burden is a fraction of what it was in 2008, when the OCR was 8.25%. Household debt relative to incomes is actually about the same as it was then, though this statistic masks a large wealth transfer from a younger cohort to an older one.”
However, it’s not just what New Zealand consumers are doing that's drives the RBNZ’s decisions.
Wednesday's OCR review will follow a week of turmoil in the global markets.
Britain’s mini-budget from last week triggered a market meltdown in the UK and forced the Bank of England to step in to halt a run on the country's pension funds. The promise to cut the top tax rate with unfunded borrowing while the central bank was trying to get inflation under control is expected to hit UK homeowners hard, with mortgage rates on the rise and house prices tipped to fall by as much as 20%.
Kiernan says the UK's “basket case" mini-budget, the ongoing war in Ukraine and alarming Consumer Price Index figures from the US will all have an effect on the New Zealand economy.
RBNZ Governor Adrian Orr will have one eye on the falling Kiwi dollar, which is causing additional problems with inflation as the cost of imported goods rises. “The currency being down more than 20% over the course of the last year adds to those inflation issues,” says Kiernan.
The drop in the dollar does benefit exporters, cushioning any economic slowdown. “So it's good in a sense. But it does mean that potentially the Reserve Bank needs to [do] more work on the interest rate side.
“Obviously if that dollar is falling, because the world economy is falling apart, then you'd argue that maybe the Reserve Bank doesn't need to push against it. “
The mayhem in the international markets isn’t just affecting the outlook for the OCR. It’s pushing up wholesale interest rates too.
The rises are in part the result strong warnings from the US Federal Reserve on inflation that have fed into higher interest rates in New Zealand, says independent economist Tony Alexander.
He says wholesale interest rates are “being pulled along for the ride” by the volatility in global financial markets.
