Mortgage rates are expected to remain elevated, but not necessarily rise, on the back of the Reserve Bank lifting the official cash rate (OCR) by twice as much as expected.
The Reserve Bank on Wednesday hiked the OCR by 50 points to 5.25 per cent, saying: “Inflation is still too high and persistent, and employment is beyond its maximum sustainable level”.
Abhijit Surya, who works for Sydney-based Capital Economics, said the move was another driver that “will push New Zealand into recession”.
“The RBNZ’s tightening bias all but firms up our forecast that NZ will enter a protracted recession this year,” Surya said.
While financial markets were expecting a 25-point hike, a 50-point lift aligns with what the Reserve Bank in February planned to do.
The Reserve Bank explained it made the aggressive move to prevent banks from cutting lending rates, rather than to push them up.
The issue is, wholesale interest rates have been falling, as there’s been a view among traders in financial markets around the world that slowing economic growth, as well as the collapse of the likes of Silicon Valley Bank, would prompt central banks to ease their rate hikes.
Nonetheless, the Reserve Bank is of the view its battle against inflation isn’t over. So, it doesn’t want lower wholesale interest rates to prompt banks to cut their mortgage rates too soon.
It fears a 25-point OCR hike wouldn’t be hefty enough to keep banks’ lending rates propped up, so opted for a whopper 50-point lift.
While the Reserve Bank said it was comfortable with current lending rates, it reiterated it wanted to see deposit rates rise. It believed an OCR hike of 50 points was required to lift these rates to levels that prompt more people to save, rather than spend.
Higher rates already priced in
CoreLogic New Zealand chief property economist Kelvin Davidson believed the impact of Wednesday’s OCR hike on mortgage rates would be “pretty limited, as tighter monetary policy has already been ‘priced in’ by the banks”.
“In other words, it still seems likely that mortgage rates are at or close to a peak, which is probably the first hurdle now cleared in terms of the housing market downturn getting closer to ending.
“That said, it’s still too early to sound the all-clear and suddenly expect sales volumes to pick up and house prices to find a floor. After all, new borrowers are still facing tough serviceability testing and a continued wave of existing mortgages are yet to be repriced to current rates of around 6.5 per cent.”
The latest available data shows that in February, 55 per cent of the $310 billion of fixed mortgage debt taken out by owner-occupiers, investors and businesses was due for refixing within the following year.
A further $36b of mortgage debt was floating.
The founder of Squirrel mortgage broking firm, John Bolton, noted the number of people who are yet to feel the pain of higher rates.
“There’s still a lot of pain to come,” he said.
“When I say there’s pain to come, it’s just a simple fact. The tightening is still occurring for all of these people that are coming off low fixed rates and that tightening is taking money out of the economy. But we’re very much at the top of the interest rate cycle, and I think it’s a pretty strong consensus out there on that.”
Indeed, the latest available data shows the average rate mortgage holders paid in January was still only 4.4 per cent, which is a couple of percentage points below current rates.
“I was dealing with a young doctor the other day and she’s probably one of those unfortunate first-home buyers that purchased near the top of the market – stretched herself into a house with her husband and [now] they’re really struggling to make ends meet. And she’s a doctor!,” Bolton said.
Bolton believed that while there may be small increases in shorter-term fixed mortgage rates, mortgage rates have probably peaked.
Bruce Patten, a mortgage adviser at Loan Market, said he disagreed with the aggressiveness of the Reserve Bank.
“There will be people that were struggling that will now really struggle,” he said, predicting mortgage rates to rise.
“I really was not expecting it to be this high, especially when you look around the rest of the world.”
Patten believed any additional rises to mortgage rates will “be the straw that breaks the camel’s back for some people”.
“They will now say, ‘I can no longer afford my mortgage. I’m gonna have to sell’.”
He said he was advising clients to “hunker down, do what you have to do to afford it”.
Overseas bank collapses won’t stop the Reserve Bank
Coming back to the brief remarks the Reserve Bank made alongside its rate decision, it suggested troubles in pockets of the banking sector overseas wouldn’t stop it lifting the OCR.
It said there was “no material conflict between lowering inflation and maintaining financial stability in New Zealand”.
“In particular, credit conditions have not tightened substantially and while increasing, arrears on mortgages and other debts remain at low levels.”
In February, 0.3 per cent of mortgage debt issued by banks was deemed “non-performing”. While this was a slight rise from 0.2 per cent during the Covid period, it was still well below the 1.2 per cent seen in 2009 following the Global Financial Crisis.
The Reserve Bank said it could provide banks with more liquidity and use other tools to smooth market functioning if it had financial stability concerns.
Furthermore, it said lifting the OCR now to reduce inflation would make the financial system more stable by limiting the need for even higher interest rates in the future.
All eyes on the Budget
The Reserve Bank believed the response to Cyclone Gabrielle would likely be more inflationary than it expected in the immediate aftermath of the disaster in February.
It said the economic impact of the event would depend on the degree to which the Government reprioritises spending decisions, the timing of activity and how spending is funded.
Nonetheless, it said: “Risks to inflation pressure from fiscal policy as skewed to the upside, particularly given the ongoing demand for government services in an environment of rising costs of provision”.
Finance Minister Grant Robertson. Photo / Mark Mitchell
Finance Minister Grant Robertson will deliver this year’s Budget on May 18, ahead of the Reserve Bank next reviewing the OCR (and publishing a more fulsome Monetary Policy Statement) on May 24.
Bank economists believe the Bank will hike the rate by another 25 points, to 5.5 per cent, and likely stop there before starting to cut the rate in 2024.
ANZ chief economist Sharon Zollner said: “There’s inevitably a degree of guesswork in judging how much is enough, given the lags with which monetary policy affects the economy, but the Reserve Bank can reasonably hope it is getting close.
“If things go the Reserve Bank’s way over the next six weeks, this could even be the top. But the fact is, inflation is above 7 per cent and looking comfortable there.
“Falling inflation remains a forecast, not a fact.”
- Jenée Tibshraeny and Raphael Franks, NZH
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