The Christmas pinch: Interest rates set to rise

Hard-pressed households buying only basics and shopping for home brand items in the run-up to Christmas are facing a jump in their mortgage repayments as the Reserve Bank’s campaign to slow the economy ratchets up a gear.

The Reserve Bank governor Adrian Orr is poised to lift the official cash rate, the rate at which it loans money to banks, at 2pm today. Banks are expected to follow quickly by setting higher interest rates which will affect people’s mortgages and other debts.

Finance Minister Grant Robertson said it was a challenging time for households heading towards Christmas with ‘‘a lot of pressure on people in work’’, but pointed to record-low unemployment.

‘‘This is a tough time but New Zealand is wellplaced,’’ he said.

However, rising interest rates and record-high inflation are not felt equally across the economy, and anecdotes suggest that lower-income households, despite the strong job market, are struggling more profoundly with inflation, which is when prices are driven up by too much money chasing too few goods and services.

ANZ chief economist Sharon Zollner said while some were definitely doing it tough, others had only trimmed their spending, such as only buying a glass of wine over a meal out, rather than a whole bottle.

She is among those predicting the OCR would rise by 75 basis points today, a move which was likely to spark ‘‘shock and awe’’ for an unsuspecting public. It would be the sharpest rise this year, after the previous five 50bp rises and single 25bp rise.

‘‘The Reserve Bank is trying to make consumers more cautious with their spending [but] people seem to be quite comfortable still spending on quite discretionary stuff like eating out,’’ she said.

‘‘People are turning to sales and trading down rather than slamming their wallet shut.’’

She predicted purchases of ‘‘big ticket items’’, like cars and boats, would drop as a result of higher interest rates.

Orr’s increase to the OCR will be the last for the year, part of its final monetary policy statement. However, further OCR rises are expected next year as the Reserve Bank seeks to return to its target inflation of 1-3%. Inflation is high at the moment, sitting at 7.3%.

Greg Harford, chief executive of Retail NZ, said consumers had reined-in spending overall, but customers were focused on the basics, shopping for cheaper or house brands, or delaying spending.