Borrowers should escape the worst despite big OCR jump – bank economist

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A lot of borrowers look set to shrug off the worst effects of the latest jump in the base interest rate imposed by the Reserve Bank.

Thursday, July 14th 2022, 8:19AM 2 Comments

by Eric Frykberg

That is because many rates payable by ordinary borrowers had already risen in anticipation, leaving limited room for further rises.

This is the view of Westpac's acting chief economist Michael Gordon.

He was speaking after the Reserve Bank followed the script like a well trained actor and did what everyone said it would do, including its own experts.

It raised the Official Cash Rate (OCR) by 50 basis points, bringing it to 2.50%.

Although the 50-point rise was the third in a row – and even one 50-point rise is rare – the latest jump was so much on the cards that bank economists struggled to show much interest in it.

According to ASB economists, the latest move was just a “cut and paste” of the RBNZ's own statements from May. It was also “one of the less dramatic meetings of late.”

For ordinary mortgage holders, the impact will also be muted. According to Gordon, floating rates would rise, but people on fixed-rate mortgages – the majority – would be spared the worst.

That is because fixed rates had already been increased by banks who knew what was coming – along with everyone else – and in some cases went too far.

“For longer-term mortgages, there is a large degree of anticipation that goes into them, and they have already been factoring in this cash rate increase and more,” Gordon said.

“If anything, that pricing has become overblown in recent weeks and is now starting to be pulled back.

“That's why we have seen some cuts to some of the two-year rates – that anticipation of Reserve Bank action had probably gone too far.”

In other words, the market had gone too far ahead of the RBNZ because of nervous fear of what was coming. Now it was having to retreat slightly.

Not everyone will be spared, though, because the impact would vary from borrower to borrower.

Gordon agreed that people taking out a new fixed-rate mortgage now would not pay more because of the RBNZ decision. But people with an existing fixed-rate mortgage could have to find a lot more money to pay the interest bill, especially if they had taken out a two year term well over a year ago and would have to renew it shortly.

Moreover, the muted impact of the latest rise might not last. According to Westpac, there is another 50-point rise coming in the next monetary policy announcement and more rises after that, til the OCR reaches 3.50%.

By that stage, the benefit of over-anticipation will have been well and truly used up, and real rises will hit the end-user – the mortgage holder.

In making its decision about the latest 50-point rise, the RBNZ admitted there were risks of an economic slowdown. But for now, the focus had to be on fighting inflation.

In a statement, its Monetary Policy Committee insisted on the need for tight monetary conditions, and it was resolute in its commitment to return price inflation to within the 1% to 3% target range – well down from the current level of 6.9%.

“The level of global economic activity, combined with the ongoing supply disruptions largely driven by both COVID-19 persistence and the Russian invasion of Ukraine, continue to generate global inflation pressures,” the committee said.

While there were signs of slowing global growth, domestic spending remained high in New Zealand, supported by high employment levels, resilient household balance sheets in aggregate, continued fiscal support, and strong terms of trade.

“In these circumstances, spending and investment demand continues to outstrip supply capacity, with a broad range of indicators highlighting pervasive inflationary pressures.”

Tags: Westpac

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