Mortgage rates could fall next year, says Orr

Reserve Bank governor says the end of OCR rises is ‘close’ but banks may sharpen numbers sooner

Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr recognises the end of the current series of sharp Official Cash Rate (OCR) hikes is in sight.

“We’re not there yet, but we’re close,” Orr told the Weekend Herald in an interview.

The RBNZ on Wednesday again lifted the OCR aggressively from 2.5 to 3 per cent (in line with expectations) and forecast it peaking at around 4 per cent by early 2023.

Once the rate hits its peak in this tightening cycle, Orr said the RBNZ would need to be “patient” and let the higher rate “work through the economy”.

It takes time for OCR changes to fully take effect, as debt holders only experience higher rates when they come to refix their loans. The average rate on the country’s stock of mortgage lending was 3.5 per cent in June — still well below the average fixed 2-year rate of 5.4 per cent offered by banks at the time.

In deciding how long to keep the OCR at its peak, Orr said the RBNZ would keep a close eye on inflation expectations.

Businesses’ annual consumer inflation expectations declined in August, according to an RBNZ survey. However, at 4.86 per cent looking one year ahead, and 3.07 per cent looking two years ahead, businesses still saw inflation overshooting the RBNZ’s 1 to 3 per cent target range.

‘Markets will be markets’

Orr said he was comfortable with the fact banks could start offering lower mortgage rates before the RBNZ finishes its job taming inflation and starts cutting interest rates to a more “neutral” level.

Indeed, he believed most future OCR hikes had largely already been priced in by banks, so didn’t see the RBNZ’s latest hawkish statement sending rates further north.

Orr suggested he wouldn’t try to pressure the market to keep rates elevated if they started turning.

He said he didn’t want to be “continually chasing” retail rates up or down.

“At the moment, we’re saying right through the next calendar year, we [the OCR] will be remaining at around 4 per cent. But markets will be markets.

“It’s a competitive market out there as well, so I know that the banks are really challenged on getting credit growth going. So, it’ll be a good time to shop hard.”

Orr wouldn’t comment on exactly when he saw mortgage rates turning, but noted longer-term rates are already coming off a bit as international funding markets see wholesale interest rates falling in response to slower economic growth.

He said it was a matter of mortgage holders making a call as to how long they want to fix for. “No one’s locked out of a housing market forever”

Orr acknowledged a change of events could turn the RBNZ’s outlook on its head. Indeed, while the above may be interpreted as Orr being dovish, the RBNZ Monetary Policy Statement, released on Wednesday, was decidedly hawkish.

The bank saw domestically driven inflation being worse than previously expected, largely due to strong wage growth.

Indeed, Orr said labour supply issues were the “topic du jour” globally.

However, he was confident aggressive OCR hikes would dampen economic growth, almost to recessionary levels, and send unemployment up to around 5 per cent — consequently cooling inflation.

He noted businesses’ future order books were looking weaker, global commodity prices were easing, New

Zealand’s terms of trade were falling, and the labour market would free up as people start moving more easily between countries.

As for the impact on house prices, the RBNZ now sees higher interest rates cooling the market a little more than expected in May, with it dropping by as much as 20 per cent from peak to trough.

Orr acknowledged highly indebted recent first-home buyers facing elevated interest rates would need to do some “belt tightening”.

However, he was confident the rates banks tested recent buyers at meant they could service their debt — provided they kept their jobs.

Orr was also confident households’ balance sheets and banks’ books were solid on aggregate.

Put to him that house prices are still way above where they were prepandemic, and higher debt servicing costs aren’t making them any more affordable, Orr said, “No one’s locked out of a housing market forever. But people do have to be careful around what they can afford to buy where and when.”

No one’s locked out of a housing market forever. But people do have to be careful around what they can afford to buy where and when.

Adrian Orr,

Reserve Bank Governor

Regrets? Only over inflation itself

Orr admitted, “Yes, consumer price inflation is bad. There’s nothing good about it. I have said we are sad about the fact people are having to be amongst higher inflation at the moment. That’s what we need to get

on top of.” Looking back at the RBNZ’s actions over the past couple of years, Orr admitted monetary policy was too stimulatory.

However, he couldn’t say whether interest rates were cut too low, whether settings were too stimulatory for too long, or whether the RBNZ could’ve soothed a dysfunctional bond market with a smaller amount of quantitative easing.

Likewise, Orr couldn’t identify specific points in time he believed the RBNZ should’ve taken different actions.

“That’s the reason we need to come back and do the research,” he said.

The RBNZ’s response to the pandemic will be considered as a part of a five-yearly review, which the bank is required to do by law, of its monetary policy remit.

The findings, which will be peerreviewed by two overseas experts, will be released later this year.

“I know this grates, but I don’t have regrets for the decisions we made at the time on the information base we had,” Orr said.

“Do I have regrets now? Yes. High inflation does no one a charge, but likewise, what were we looking at?”

Deflation would’ve been worse

Orr noted inflation was also exacerbated by unforeseen events like Russia’s invasion of Ukraine.

Asked whether the RBNZ could’ve leaned more on the Government to stimulate the economy in 2020 and 2021 to avoid so much monetary stimulus pumping up the housing market, Orr said it wasn’t the RBNZ’s job to consider house prices.

“We warned people, there’s going to be a policy mistake in this world of uncertainty — either higher inflation and then tightening, or deflation and unemployment. And we’re in the former, which I’ve always thought is the better if we had to choose between those evils,” Orr said.

“Why is it the better? Because we’re still in the game, people are employed, our financial system is functioning, and we can get on top of inflation. We’re used to doing that. Central banks are not used to getting out of deflation.

“And when you’re a highly indebted nation like New Zealand, deflation is disastrous. The real cost of your debt just keeps going up daily.”