Why the tightening cycle isn't over yet
Last week's surprise OCR hike to 2.5% was just the start of a longer tightening cycle than most economists expected, according to Cotality chief economist Kelvin Davidson (pictured), writing in OneRoof, who says advisers should prepare clients for "at least two more increases this year."
The Reserve Bank's decision, backed unanimously by all six monetary policy committee members, ended more than three years without a hike and wasn't a complete surprise, Davidson said, given the bank had signalled a rise was coming even before the Iran war escalated.
Davidson pointed to two motivations behind the move: the OCR sitting below "neutral," giving the committee room to act, and a desire to counter recent loosening in financial conditions, such as a lower exchange rate and falling wholesale interest rates. He cautioned, however, that fixed mortgage rates may not react directly to further hikes, since some increases are already priced into longer-term fixed rates.
Floating rates are a different story: BNZ is already lifting its own variable rates to as high as 6.19% from 29 July, with ASB flagging floating-rate borrowers as most exposed to further hikes since short-term pricing responds most directly to OCR moves.
Bank forecasts diverge on how high rates will go
Forecasts for where the OCR ultimately lands now vary widely: Westpac expects two more hikes this year, reaching a peak of 4% at the September 2027 Monetary Policy Statement, while ASB has pencilled in a steadier path of 25 basis point hikes from September to around 3.25% by year end. Kiwibank remains the most cautious of the three, arguing the domestic recovery needed to justify further tightening "is just not there yet."
The unanimous vote itself marked a shift from May, when the committee was split 3–3 on whether to hike at all, and the move still caught several economists offside, with Kiwibank, ASB, and Westpac all having leaned toward a hold.
Borrowers already locking in longer
The lending data shows borrowers are ahead of the curve.
For the sixth consecutive month, around 50% or more of new lending in May was fixed for more than a year, with two-year terms the most popular, while 18-month and three-year fixes are also gaining traction. Only around 20% of new lending remains on one-year fixed terms, a low share by historical standards.
Davidson described this as a sensible approach "in an uncertain world where inflation may prove sticky and interest rates are probably trending slowly higher."
With June's inflation data due Friday and ongoing volatility from the US-Iran conflict, advisers may find client conversations increasingly focused on rate-path uncertainty rather than near-term relief.
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