PHOTO: Official cash rate (OCR) lift will mean homeowners will paying more on their mortgage
There was never any doubt that the official cash rate (OCR) would be increased today. The only uncertainty was how big the rise would be, and in the end the Reserve Bank opted for the ‘shock factor’ of a 0.5% increase, taking the OCR to 1.5% – its highest level since August 2019 (when it was dropped from 1.5% to 1% on the 7th).
We had slightly leaned towards this outcome in advance of the decision, just because the minutes of the last meeting showed that a 0.5% rate rise was a very close-run thing last time (even though they eventually opted for 0.25%), and if anything the inflation environment has got worse since then, but with unemployment still low too. Perhaps the biggest problem for the RBNZ is the risk that inflation expectations get out of hand, resulting in a longer period of high actual inflation.
However, the decision was very finely balanced, and a 0.25% increase would have been no surprise either, possibly as they took the conservative approach and waited for the full Monetary Policy Statement on 25th May to have the opportunity to provide detailed analysis and projections.
For the housing market, the implications are clear – even though mortgage rates have already been rising again in recent weeks, this process isn’t over yet. Many ‘special’ fixed-rate mortgages in the popular 1-2 year terms are currently in the range of 4-5%, and it seems fair to suggest that this could end up in the range of 5-6% over the coming months, perhaps a bit above. Although many borrowers are still sitting on their lower rates agreed last year or earlier, about 50% of existing loans in NZ are up for renewal over the next 12 months, with a sharp repayment rise looming.
At least in terms of credit availability, however, the past few months may be looked back upon as the low-point. After all, some banks are reportedly making a bit more low-deposit finance available, while the relaxed CCCFA rule changes are set to commence soon.
Given the risk of higher interest rates feeding back into a slower economy, we still wonder if the ultimate peak for the OCR will be lower than the >3% figure that the RBNZ currently envisages. But either way, there are more mortgage rate increases to come, which will reinforce the housing market slowdown that has now so clearly arrived.
Of course, with unemployment low and ability to repay having been tested at higher interest rates anyway, we think conditions are still in place for a ‘soft landing’ rather than serious downturn.
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