Mortgage pain coming

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Be clear, very clear; interest rates are set to start rising

Thursday, December 12th 2013, 12:19PM 1 Comment

While the Reserve Bank left its official cash rate unchanged today it has made it clear they will start rising next year.

Reserve Bank governor Graeme Wheeler said today that he expects the official cash rate to rise 2.25% over the next nine quarters.

When interest rates start rising people will feel them.

Wheeler says that 75% of mortgages are either on floating rates or fixed rates of less than 12 months.

“When Monetary Policy does start tightening these mortgage costs have the potential to start biting,” he said during a media conference following today’s OCR announcement.

Wheeler said the bank had no intention of raising rates today, but there are factors, particularly around inflation and house process it is watching carefully.

“We didn’t consider a rate hike today. We didn’t think it was appropriate.”

While the RBNZ hasn’t indicated when the OCR will rise, it said in its statement today, that “the bank will increase the OCR as needed in order to keep future average inflation near the 2% target midpoint.”

The consensus view amount economics is that’s March is the most probable time for the first increase.

“We continue to expect the first OCR hike will come in March next year,” ASB chief economist Nick Tuffley says.  “The risks around that call look more balanced than our thoughts going into the MPS.  The RBNZ has already incorporated into its forecasts two factors we saw that could delay the start of the OCR cycle: a later pick-up in residential constructions and a lower peak in house price growth.

One thing that changed in today’s announcement is that the 90-day interest rate track implies a similar start to the September forecasts; that is March/April 2014. 

However, the end point for the 90-day outlook is marginally higher at 4.8% compared to 4.7% earlier. 

“The added emphasis the RBNZ has put on achieving the 2% target band mid-point, which led to the lower inflation forecasts, likely contributed to this upward revision at the margin given the extra wiggle room the higher TWI outlook gives the RBNZ,” Tuffley says.

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