OCR decision puts an end to mortgage rate wars

Experts discuss where the central bank will go from here

OCR decision puts an end to mortgage rate wars

The long-anticipated Official Cash Rate (OCR) hike has finally happened, despite ongoing heavy restrictions on Auckland and parts of the Waikato, and the first banks have already signalled rises in their interest rates in response.

The majority of New Zealand economists had firmly pencilled in a rate hike for October, and most are expecting the next several statements to come with similar decisions.

The rate hike signals a firm end to record-low interest rates and mortgage rate wars among banks, which have been rumbling on at a steady pace for the last several years, and were accelerated further by the COVID-19 pandemic and stimulatory economic settings.

Speaking to NZ Adviser, Kiwibank chief economist Jarrod Kerr said he expects the OCR to carry on rising until it hits 1.50%, despite some ongoing uncertainty around Alert Level restrictions.

“We haven’t seen much of a reaction in interest rates or currency markets so far, but the decision hit the sweet spot and delivered what everyone was expecting,” Kerr said.

Read more: Reserve Bank releases October OCR decision

“We’re now likely to see a rise every six weeks until we get to an OCR of around 1.50%. We expect that with as reasonable certainty as one can have in the COVID world, and I think once we get out of this lockdown and are running around with vaccine certificates, the economy will bounce back with a vengeance.”

“If there’s anything that goes wrong with getting us out of lockdown then that could clearly delay things, but we’ve factored the impact of the lockdown in the current quarter into our outlook,” Kerr said. “We are expecting to see a strong bounce back in the fourth quarter.”

ASB chief economist Nick Tuffley said that the economy was becoming visibly overheated prior to the current lockdown, particularly in the mortgage and housing market.

However, he said that going backwards still feels like a “big risk”, particularly with elimination efforts seemingly floundering, and with the government adjusting its strategy towards containment. He noted that restrictions might stay in place for some time in Auckland, which could be cause for the Reserve Bank to “tone down” its easing of stimulatory settings.

“What the Reserve Bank has made clear is that although we have a lot of near-term volatility with the lockdown, it’s really the medium term two-three year outlook for inflation and employment that is going to be driving their decisions,” Tuffley said.

Read more: OCR to remain NZ’s benchmark interest rate

“At this point, it still looks like we’re going to see a fair degree of inflation pressure and labour market tightness, so everything does point to the Reserve Bank lifting the cash rate at the next meeting or two.”

“Right up until lockdown started, it was clear that the economy was becoming very overheated, and that inflation and wage pressures were going to be very strong,” he explained.

“We’ve been in lockdown for seven weeks now, there are some strict restrictions on Auckland as the outbreak rumbles on, and so the issue will be whether that will create enough uncertainty to change that outlook. The Reserve Bank may choose to pause or tone down the lowering of interest rates, and that does feel like a big risk given that we’ve been at a bit of a crossroads over the last week or two.

“Elimination has started looking a bit more challenging, and we’ve realised that there are going to be restrictions in place for a period of time. There’s been pressure on Auckland businesses in particular, and we’re likely to see that continue, though hopefully not for too long.”

Despite the ongoing uncertainty, Tuffley said that the strong, rapid stimulatory measures have done their job, and we are unlikely to see the kinds of interest rates that have been the norm over the past few years.

“It does look like it will all be going upwards from here,” he said.

“What I’ve seen over the last 18 months is that we didn’t just throw the kitchen sink at trying to get the economy going - we threw the whole kitchen, if not the whole house.

“With the benefit of hindsight, super low interest rates did help get the economy going, particularly in the housing space. We probably don’t need such low interest rates now, unless we do have a really sustained period of widespread restrictions.”

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