The Reserve Bank of New Zealand (RBNZ) raised the Official Cash Rate 0.5 percentage points today, and experts have warned that homeowners and buyers can expect more pain in the months ahead.
The rise took the OCR to 3% for the first time in almost seven years.
The RBNZ has increased the OCR seven times since October 2021, and the last five hikes including this one, have been big ones – 0.5 percentage points each.
The aim of the game has been to blunt rising inflation – now at 7.3% – with higher interest rates.
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The RBNZ said in its Monetary Policy Statement that "expectations for inflation have eased recently but remain elevated relative to history".
"The Monetary Policy Committee expect they will need to increase the OCR by more than expected in May to return inflation to the 2 percent target midpoint and employment to its maximum sustainable level."
The bank said that house prices were continuing to fall towards more sustainable levels, adding that it expected "house prices to decline further over coming months".
"Construction sector activity has remained at a high level, but the outlook for residential construction has weakened. The combination of acute labour and materials shortages in the construction sector has constrained activity and contributed significantly to domestic inflationary pressure.
"Future work orders have begun to dry up beyond construction firms’ existing work pipelines. Higher interest rates, tighter lending conditions, and rising costs are weighing on demand."
Kiwibank chief economist Jarrod Kerr said the Reserve Bank had made it quite clear, by raising its OCR forecast peak from 3.95% to 4.1%, that inflation needs to be smashed. “The [Reserve] Bank has one really blunt horrible tool in interest rates. It clearly intends to smash demand. All the rest of that Monetary Policy statement is just fluff.”
The Reserve Bank’s message to banks, said Kerr, was that it didn’t want mortgage rates to fall in the way they have been in recent months. “They don’t want them to go down. That counters what they are doing to smash demand.”
That includes demand for mortgages and other goods and services in general.
Kerr is predicting two more 0.5 percentage point rises to the OCR this year. Kiwibank has not, however, changed its prediction of the residential property market bottoming out 10-15% below the peak late last year.
CoreLogic NZ’s chief economist Kelvin Davidson did not expect mortgage rates to rise as a result of the OCR rise - just yet. “The upwards path for the OCR has already been priced in to current mortgage rates, at least the shorter term fixes such as one year rates,” Davidson said.
“All in all, the property market will continue to face a testing period for the rest of 2022 and into 2023. Low unemployment remains a key support, but any signs of job losses coming through would tend to increase the eventual size of this downturn in property values.”
Kiwibank chief economist Jarrod Kerr predicts two more 0.5 percentage point rises this year. Photo / Fiona Goodall
Rowan Dixon, acting chief executive at REINZ, said of today's hike: “REINZ’s July data shows that while the median property price is showing an annual decrease, affordability remains an obstacle for many — driven by rising interest rates, inflation, and tighter lending criteria. Sales counts have also declined across the country by 36.7% — in part due to higher mortgage interest rates, LVR’s and tightened lending criteria once again.
“This creates a challenge for many buyers. Increased borrowing costs mean that securing finance and debt servicing will continue to impact on their ability to enter the market."
ASB senior economist Chris Tennent-Brown said before the decision that homeowners need to budget for higher mortgage rates. “Lenders will likely do budget calculations for loan eligibility using interest rates that are higher than those currently available to borrowers,” he says, predicting that mortgage rates will settle at around 5%-6.5%, but won’t rise “to the higher levels we saw in the 1990s and early 2000s”.
Even when the OCR stabilises, homeowners could still face mortgage increases. ASB noted last month that prior to the pandemic, the RBNZ had proposed banks hold more capital. The measure was put on hold thanks to economic measures to counter the pandemic, but will be instituted eventually. “The RBNZ plans to phase in higher capital requirements for banks over the coming years, and that will lead to increases in bank funding costs and, in turn, mortgages,” Tennent-Brown says.
Westpac’s acting chief economist Michael Gordon sees value in fixing mortgages for terms of up to two years. “We would still regard fixing for terms longer than this as expensive, but this option may suit those who want more certainty in their repayments.”
ASB economist Chandna Bedi says that tightness in the labour market is one of the major reasons why inflation could take longer than anticipated to cool and move towards the RBNZ’s target rate of between 1 and 3%.
