Mortgage rates to range as high as 7.5% – Kiwibank economists

This even though they don't see the OCR going as high as currently forecast

Mortgage rates to range as high as 7.5% – Kiwibank economists

Mortgage rates will range as high as 7.5%, with all rates to be above 6% over the coming year – well over double what they were a year ago, Kiwibank economists have predicted, even as they don’t see the OCR going as high as currently forecast.

Read more: OCR to lift by another half point on May 25 – Reuters poll

Mortgage rates currently range from around 4.4% to 6.9%, said Kiwibank’s chief economist Jarrod Kerr, senior economist Jeremy Couchman, and economist Mary Jo Vergara.

In Kiwibank’s weekly First View publication, Kerr, Couchman, and Vergara said “mortgage rates are rising, and will rise further with expected RBNZ [Reserve Bank] tightening,” interest.co.nz reported.

There’s a strong consensus in the marketplace that RBNZ will announce another double hike, that is by 50 basis points to 2%, following a 50 bps rise in April, as it tries to rein in galloping inflation.

Read next: OCR decision puts an end to mortgage rate wars

“All mortgage rates on offer are likely to lift from the current levels of between 4.4% to 6.9%, to 6% to 7.5% over the coming year,” the Kiwibank economists said. “More than 60% of outstanding mortgages are either floating, or rolling off fixed rates this year. The impact of the RBNZ’s tightening is being felt now and will continue to weigh on household budgets in the year ahead.”

All eyes will be on RBNZ’s latest OCR track that will appear in the monetary policy statement on Wednesday, as it will present the central bank’s estimates of where the OCR will be over the course of the next three years, interest.co.nz reported.

“The OCR track will have been pulled forward, to take account of the two 50bp moves, and pushed higher – although we don’t expect the end point to be materially higher, given the 'stitch in time’ approach,” the economists said. “We expect to see the end point lift from 3.35% to 3.5%. We suspect the RBNZ will [actually] stop around 3%. Why? Because the impact of every move to date, and from here, is causing a material impact on the housing market and household consumption. Cooling the housing market and taming consumption is the desired impact of rate hikes.”

The Kiwibank economists are also forecasting house prices to fall by around 10% by year end.

“Consumption growth will wane as households face the negative wealth effect of falling house prices and a continued cost-of-living crisis,” they said. “Of course, it’s easy to say that the risk of a recession rises with every rate hike. Recession risk is why we expect the RBNZ to pause at 3% – and not follow through with its forecast tightening in entirety. If we’re right, wholesale markets have too much in the way of hikes priced. The terminal rate implied in interest rate markets is closer to 4%. We expect to see a slight rally in rates, lower yields, as the market realises fewer hikes are likely."

Kerr, Couchman, and Vergara predicted RBNZ to move back to 25bp moves beyond this Wednesday, and the cash rate to reach 3% by November, interest.co.nz reported.

“Come November, the housing market is likely to have experienced a 10% decline in prices,” they said. “The negative wealth effect will have dampened consumption, and the cost-of-living crisis is likely to be lingering. We suspect a move to 3% will be enough to turn the Kiwi economy and tame the inflation beast. We simply think the economy will struggle with aggressive tightening to 3.5% and beyond.”

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