What the RBNZ's surprise OCR hike means for home loan rates

Australia and Canada may have paused their cash rate increases but that has not deterred our central bank.

Thursday, April 6th 2023, 8:35AM 2 Comments

The Reserve Bank surprised everyone yesterday hiking the official cash rate 50 basis points instead of the predicted 25 points.

It has made economists revise their forecasts for the next OCR announcement. Here’s what some of them are saying:

ASB: We have pencilled in a final 25bp OCR increase to 5.5%
ANZ: we still expect a 25bp hike at the May MPS, but this now takes the OCR to a peak of 5.5%. We then expect a long period on hold, and have pencilled in three cuts in late 2024 taking the OCR back down to 4.75%. Obviously that’s a hat-tip rather than a firm expectation.
BNZ: Frankly, we are bamboozled as to what to forecast for the next meeting, in May. We think the RBNZ has done more than enough to impact the things that it can impact. We believed that before today’s bombshell. On that basis, we are strongly tempted to stick with our view that the cash rate peaks at 5.25% and, hence, assume rates are unchanged at the May meeting.
CoreLogic: A reasonable assumption for now seems to be that we get one more 0.25% rise on May 24, with the tightening cycle potentially ending there.
Kiwibank: We must expect a 25bp move to 5.5% in May.

While further increases are now on the cards, Kiwibank warns it could be a step too far.

“Even if it is a step too far, it’s a step they are clearly willing to take (and they can mop up afterwards). We continue to highlight the risk of overtightening. The reality of which rises with every move.”

BNZ economist Stephen Toplis explained the RBNZ's move as follows:

“When push comes to shove, perhaps today’s decision had very little to do with economic conditions and more to do with the fact that falling global interest rates had driven New Zealand wholesale rates lower. The Reserve Bank was clearly uncomfortable with this so felt the need to haul on New Zealand’s anchors to offset the potential impact of this.

“The Committee was comfortable that current lending rates faced by businesses and households will help ensure core inflation and inflation expectations begin to moderate. However, wholesale rates have fallen significantly since the February Statement, and this could put downward pressure on lending rates. As a result, a 50 basis point increase in the OCR was seen as helping to maintain the current lending rates faced by businesses and households, . . . “

“In our opinion, it would have been better to raise the cash rate by 25 basis points and caution that further rate increases would be likely if labour market conditions and inflation did not move in the desired manner. There was no need to go like a bull-at-a-gate at this juncture. This is not the start of the tightening cycle.”

The question now is where will home loan rates go?

Looking back at history using Good Returns' comprehensive database of home loan rates would suggest rates will rise.

Click here to see ANZ's two-year fixed rate v the OCR from 2002 to today.

The three times the OCR was at 5.50% the two-year fixed rate was higher than it is today.

With falling global interest rates, the need to increase fixed rates this time around maybe unnecessary.

Tags: OCR

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Comments from our readers

On 6 April 2023 at 9:40 am Murray Weatherston said:

I think these comments show the bank economists and others are forecasting what they think the RBNZ should do (ie their forecasts are really either policy advice or what they think should be done) rather than forecasts of what they think the RBNZ will do.
Sometimes the two methods result in the same answer, but not always.
My question to them all would be "what were the signals from RBNZ spokesmen that they saw in the last several weeks that led them to discount the previously signalled 50-75 bp increase.
And no the answer shouldn't be the failures of SVB and CS led us to believe the RBNZ would go wasy. What did RBNZ say about those events if anything?

On 13 April 2023 at 1:38 pm Murray Weatherston said:

Even Liam Dann at NZ Herald seems to have finally got it. In his piece today 13 April he says

"Last week, the Reserve Bank increased the OCR by 50 basis points to 5.25 per cent, shocking economists and politicians who had expected a softer increase.

However, NZ Herald business editor-at-large Liam Dann says that this should not have come as a surprise.

“The Reserve Bank’s position had not changed from February. So in actual fact, they did exactly what they said they were gonna do in February, and they’re still on track to take the official cash rate up as far as 5.5 per cent, quite possibly, which was their last forecast.

“What had happened in the interim was that those international money markets had moved down a bit, so we’d sort of seen the economists and the commentators and the journalists all sort of soften their position. But it was never the Reserve Bank that said that.”

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