The Reserve Bank of New Zealand has been one of the most aggressive central banks this monetary cycle, lifting official interest rates by 5.0%:
Most economists expect another 0.25% increase at Wednesday’s monetary policy meeting, bringing the official cash rate (OCR) to 5.50%, the highest level since December 2008.
If the Reserve Bank does hike, it will be the 12th consecutive increase since the tightening cycle commenced in October 2021.
From there, the picture is cloudy.
The Reserve Bank’s February Monetary Policy Statement forecast a peak in the OCR of 5.5% late in the year.
Therefore, if the Reserve Bank does hike, it will have hit its forecast roughly six months early.
Given this, it is likely the Reserve Bank will forecast a new higher peak in the OCR.
Bank economists have already lifted their OCR projections.
Economists at New Zealand’s largest bank, ANZ, have forecast an OCR peak of 5.75% by July, as have economists at Capital Economics.
Meanwhile, Westpac NZ’s latest economic summary warned that inflation will remain stubbornly high necessitating an OCR peak of up to 6%.
Westpac’s forecast would see the nation’s effective mortgage rate – defined as the average interest rate borrowers pay on all outstanding mortgages – rise to around 6%, which is almost double its low in April 2022 (3.2%):
The impact on New Zealand mortgage holders would be brutal, and will “drain a large amount of cash out of households’ wallets”.
Westpac forecasts that “around 50% of all fixed rate mortgages will come up for repricing over the year ahead, and the average mortgage rate is set to rise by a further 150 bps by early 2024”.
“That will see the average household’s spending on interest costs increasing from around 5% of their disposable income in 2022 to 10% in 2024, and some borrowers will face much larger increases”.
The expected rise in interest rates comes as Roy Morgan research shows New Zealand mortgage holders are increasingly concerned about rising repayments:
63.3% of New Zealand mortgage holders say they are ‘worried about interest rates at the moment’, up from a low of only 21.6% in March 2021.
Moreover, more than half (54.1%) now say they are ‘worried about interest rates at the moment’, up from 34.6% in June 2021.
As shown in the first chart above, the Reserve Bank of New Zealand has hiked rates more aggressively than nearly every other central bank.
There is more pain to come on Wednesday.
