The Reserve Bank of New Zealand (RBNZ) has already smashed mortgage holders with five consecutive 0.5% official cash rate (OCR) increases, which lifted the OCR to 3.5% from 0.25% in August 2021.
Earlier this month, Statistics New Zealand reported that national annual average ordinary hourly earnings soared 7.4% in the year to September, which followed a 7.2% lift in consumer prices over the year.
The rising consumer and wage inflationary pressures has most analysts tipping the RBNZ to hike the OCR by 0.75% at this Wednesday’s monetary meeting, which would be the largest single increase since the OCR was introduced in 1999.
In fact, in the 23 years since its introduction, New Zealand’s OCR’s has never been increased as aggressively as the past 13-months.
And if the OCR is hiked by 0.75% on Wednesday, it would represent the largest increase in official interest rates in the world:
New Zealand will lead interest rate race if it hikes by 0.75% on Wednesday.
Earlier this month, Westpac warned that more than half of New Zealand’s mortgage borrowers will soon refix to rates that are 3% higher than they are currently paying:
One of the major complications in the RBNZ’s fight against inflation is the prevalence of mortgage rate fixing. Around 90% of New Zealand mortgages are on fixed rates, and many of those are still locked in at the very low interest rates that were on offer in the early stages of the pandemic. That’s meant large numbers of households are yet to feel the impact of rate hikes to date, which has allowed them to maintain their spending patterns.
That picture will change dramatically over the coming months, with more than half of all mortgages coming up for repricing over the next 12 months. In many cases borrowers will face refixing at rates that are 3 percentage points higher than those they are currently on. And as that occurs, we’re certain to see a slowing in domestic demand.
Westpac also forecast that the RBNZ would increase the OCR “to 5% and to hold it there for the next couple of years”.
The implication is that New Zealand’s economy faces stiff headwinds as house prices (which are already down around 12%) combine with sharply increasing mortgage repayments to slash household consumption, which is the economy’s biggest driver.
The timing could not be worse for Prime Minister Jacinda Ardern, who will go to an election late next year with the economy slowing fast and thousands of households in deep mortgage stress.
