More mortgage pain is on the way, with the Reserve Bank expected to raise the Official Cash Rate tomorrow by as much as 0.5 percentage points
Economists are divided on the size of the increase but all are certain there will be one, with the Reserve Bank making clear its intention to battle rising inflation.
Borrowers coming off two-year fixed rates this year could find themselves paying 2% more in interest, while some first home buyers could find themselves failing mortgage affordability tests, locking them out of the market.
"Potentially, some people won’t be able to borrow,” says Kiwibank chief economist Jarrod Kerr.
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Tomorrow’s hike would be the fourth since October, so depending on the size of rise borrowers could be facing a new OCR of 1.25% or 1.5%.
Those in the 1.25% camp are Westpac, and ASB and BNZ, although both the ASB and BNZ are 50/50 on a 0.5 point rise. “The odds probably aren’t much better than a coin-flip at this point,” says ASB ecobomist Nathaniel Keall.
ANZ chief economist Sharon Zollner is predicting a 0.5 point rise. “The RBNZ has a big job to do to rein in runaway inflation, and the sooner they rip into it, the lower the economic cost is likely to be,” she says.
Kiwibank chief economist Jarrod Kerr says higher interest rates are designed to but the brakes on spending. Photo / Supplied
“The main reason people say they shouldn't or wouldn't [increase the OCR to 1.5%] is that that the economy is clearly slowing and at risk of hard landings. We don't actually disagree with that, but we think that's outweighed by the fact that if they don't rein in inflation promptly, then you're actually going to require a hard landing [anyway].”
The language the Reserve Bank uses in its announcement tomorrow is going to be just as important as the actual rise, she adds.
Zollner has an ally in Deloitte chief economist Zoe Wallis who is also predicting a 0.5 point rise. “ It’s a pretty close call. I think this time around the RBNZ will choose to be more aggressive to keep inflation expectations well anchored,” Wallis says.
“However, I expect that we will shift back towards [rises of 0.25 points] from May onwards.”
Zollner says there are no easy choices for Reserve Bank governor Adrian Orr, with the economy looking anything but smooth, house prices falling, consumer confidence being “pummeled”, and budgets getting squeezed. “On the other hand, the wall of inflation is vertical and so far, completely unyielding,” she says.
ANZ chief economist Sharon Zollner says the cost failing to get inflation under control would be severe. Photo / Dean Purcell
The RBNZ mandate is first and foremost to control inflation. It must, however, also consider employment. Following the last rate rise in February, Orr said the biggest regret would be losing control of inflation. “Fixing that would require far higher interest rates, and very likely [result in] a deep recession and sharp rise in unemployment – a la 1991,” says Zollner.
“It’s still entirely reasonable to both hope and forecast that the inflation problem can be resolved with a soft landing, a relatively gentle slowdown that doesn’t involve an ugly unemployment rate. But the higher inflation expectations are allowed to go, the slimmer those hopes become.”
Just how high the OCR will go is of concern to buyers and homeowners. Wallis says the combination of an increasing cost of living and rising mortgage rates is already having an impact. The Reserve Bank will need to be cognisant of the elevated levels of household debt and that rising interest rates will ultimately cool consumer spending, she says.
Kiwibank, BNZ and others are predicting the OCR will peak at 3% next year. That means it’s only going to get worse for borrowers. “Consumers need to be aware that mortgage rates are still rising, there's still more hikes to come,” says Kerr.
Kerr says ongoing rises will prevent some buyers and owners from borrowing. “Higher interest rates are designed to try and dampen all of that down. Refinancing to take to take money out to [spend] .” What’s more there is not much appetite by New Zealanders to spend anyway, he says.
Zollner adds: "The Reserve Bank made it clear in its forecast in February that the OCR is going to continue to rise over the next 12 months at least.”
