Rate cuts won’t mean instant relief
More steep interest rate rises may be off the table, but mortgage and rent costs paid by households and businesses are likely to increase this year, a global consulting firm says.
Late last year the consensus was that rates had peaked, and mortgage relief would soon follow, but that view was shaken after ANZ recently forecast two more official cash rate (OCR) hikes in the first half of the year.
On Wednesday, the Reserve Bank put an end to speculation about looming rate rises by announcing the OCR would remain at 5.5%. The bank said the OCR had to remain at a restrictive level for a sustained period of time to reduce inflation, but it also lowered its OCR track and took a slightly more “dovish” tone in its statement. The move left some analysts picking there would be a cut to the OCR in November.
But that did not mean interest rate relief was on the way any time soon, according to the Boston Consulting Group (BCG).
The consultancy has just published The ‘Top 10’ Focus Areas for New Zealand Executives in 2024, and interest rates and their impact on consumers and businesses feature prominently in it.
BCG New Zealand co-managing partner Kelly Newton said it was easy to assume that because the OCR looked to have peaked the pain for mortgage holders and renters had peaked as well. But that was not the case, and it was largely due to New Zealanders’ preference for fixed-term mortgages, she said.
More than 80% of mortgages had fixed rates, and a large majority favoured one- to three-year fixed terms.
“Fixed-term mortgages create a meaningful lag between changes in the OCR, mortgage interest rates offered by banks, and the average interest rates actually paid on outstanding mortgages.”
The delayed impact of interest rate changes on mortgage holders had been demonstrated before, she said. That was when the
OCR hit a long-term low of 0.25% in March 2020, but the average paid mortgage rates did not bottom out until 18 months later. There was also room for mortgage rates to move higher, even if interest rates remained frozen, she said. “Mortgage rates in a more normal market tend to be roughly 3% higher than the OCR, whereas currently the OCR and rates paid are nearly identical. “We are not expecting the OCR to decrease significantly or at all until 2025, and any real relief for home loan borrowers is likely to only come 18 months after rates start to fall.”
Newton said the protracted pressure on mortgage holders would also have a flow-on effect on renters, as landlords passed on the added expense to them, she said. “Households are spending more on rent than they ever did, with the median rent at about 43% of the median income, according to Ministry of Business Innovation & Employment data.
“It has reached a point where so much of Kiwis’ money is going on housing, that any additional impact from interest rates has a large effect on discretionary spending.” The upshot was that the mortgage rate catch-up had a broader economic effect, as it meant consumers were likely to become even more price sensitive in 2024, she said.
“Homeowners and renters are increasingly stretched, and that will impact on their budgeting, and limit discretionary spending further. Every time a consumer decides not to go out for lunch, or buy a new product, or travel somewhere that is lost revenue for businesses and employers.”
For businesses, the impact of the interest rate environment was two-fold as their borrowing rates also continued to be elevated compared to historic levels, she said.
It meant businesses had to prepare for a period of belt-tightening, and look at potential opportunities to help them survive, and come out of the cycle well-positioned for the future. Retailers needed to think about ways to draw customers to their goods, for example, she said.
“They should consider how they can give greater value to customers through more services or other offerings to differentiate themselves, and also ways to make it easier for customers to buy from them.”
But boosting productivity was the big one for all businesses, Newton said.
“It is about making decisions on how to invest in productivity, and there are two levers for this.
“One is to reduce costs, which could mean cutting non-essential services that don’t provide returns, and the other is to take up opportunities for growth, which could be investing in newer technology.”