‘All guns blazing’: Could interest rates hit 7%?
What the experts think about the RBNZ’S latest forecast.
The Reserve Bank of New Zealand (RBNZ) lifted the Official Cash Rate on Wednesday by 0.5 percentage points to
2%. That brings the tally of rate hikes by the RBNZ since October 2021 to five now, and the OCR back to levels last seen in 2016.
And Kiwis should prepare themselves for more pain, with the RBNZ’S Monetary Policy Committee stating it will “continue to lift the OCR at pace to a level that will confidently bring consumer price inflation to within the target range”.
ANZ’S chief economist, Sharon Zollner, says the RBNZ has gone in “all guns blazing”, stating that future rises will come faster than previously indicated. The OCR is now expected to peak at 3.95% in mid next year. For home-owners with mortgages that means more pain in the pocket on the horizon, as mortgage rates typically follow the direction of the cash rate.
Jarrod Kerr, chief economist at Kiwibank, says banks had already price into their mortgage rates the 0.5 percentage point rise, but the RBNZ’S Monetary Policy Statement was a shock and the new forecast could see mortgage rates push beyond 6% to even 7%.
“If you took a mortgage out in recent years, you would have been tested [at a rate of around 6%]. That’s the rate the bank thinks that you can handle. But that’s the top. Mortgage rates are heading towards those test rates. There is going to be a lot of belt tightening and suffering as mortgages rise.”
Official Cash Rate: Fall and Rise
The chart shows the movement in the Official Cash Rate between September 2014 and May 25, 2022, when the Reserve Bank increased the rate by 0.5 percentage points to 2%
Most Kiwi mortgage-holders are on fixed rates so the impact of the OCR hike won’t be felt until they have to refix, but a lot of fixed rate mortgages are coming up for renewal this year, which could leave many with significantly higher mortgage repayments.
Zollner predicts that the RBNZ will raise the OCR another 0.5 percentage points to 2.5% at its next Monetary Policy announcement, on July 13, but revert to smaller increases of 0.25 percentage points. “We continue to forecast the OCR being raised to a peak of 3.5%, but stress again that this forecast assumes the wheels don’t fall off the housing market, the labour market, nor New Zealand’s commodity prices in the meantime. This feels like the kind of global environment where the picture could change very quickly.”
A rising OCR is going to keep downward pressure on house prices, says Corelogic chief economist Kelvin Davidson. “For the housing market, the implications are clear. We’re not yet at the end of this rising cycle for mortgage rates, and that will keep a degree of downwards pressure on
property values, especially since about 50% of loans are currently fixed and are yet to face the true costs of higher rates. But that day of reckoning will happen within the next 12 months.”
The RBNZ believes that house prices might drop by up to 15% from the peak late last year to trough, which is expected at the end of this year. Those prices have already fallen 5%.
On the subject of first home buyers, RBNZ Governor Orr pointed out that house price drops were countered by the increased cost of paying a mortgage thanks to rising interest rates. It’s not the RBNZ’S role to influence house prices.
Home-owners have reacted to the threat of more mortgage-rate increases by moving increasingly from variable to fixed rates, according to the Bankers Association, which this week released its Banking Insights figures from the second half of 2021. In the six months to December 31, the number of home loans on variable rates dropped by 3.9% and now represents only 19.7%.
The good news is that, according to the report, just short of half of all mortgage holders are ahead with their repayments,
“Around 44% of people with a home loan are ahead on their repayments,” New Zealand Bankers’ Association chief executive Roger Beaumont, said on Tuesday. “That’s likely because, as interest rates have declined over the last few years, they may have retained their repayments at the same level. Depending on their loan, others may have increased their repayments further to get ahead and repay their loan more quickly. This shows good financial capability among people with home loans. It also means they’re quite well placed in an environment of rising interest rates.”
Beaumont said only 2% of customers were behind on loan repayments. Of the 1.2 million Kiwis with home loans, 4300 were granted hardship status by their banks over the six month period. That was a decrease on the first half of the year.