As the Reserve Bank announced an increase in the official cash rate (OCR) by 50 basis points to 2% on Wednesday, it added that further hikes of a similar amount were likely to occur in the coming months as it sought to curb spiralling inflation that has already hit a 30-year high of 6.9%. These increases are expected to repeat in July and August, with smaller increases predicted in September and December that would culminate in the OCR reaching 3.5% by the end of the year and 4% leading into 2023.
Following this announcement, the New Zealand dollar rose by half a cent to trade at 65.00 against the US dollar. Wholesale interest rates also rose by about 20 basis points. According to the Monetary Policy Committee, though the economy was strong, it was burdened by higher fuel costs and food prices, problems that created uncertainty and were slowing down global growth. It stated that the interest rate hike was intended to help keep consumer price inflation within the target range.
Inflation is expected to rise to 7% by mid-year and steadily decline to 5.5% by the end of the year. The RBNZ forecast further indicates that inflation will likely get back to its target zone towards the end of 2023. The Reserve Bank is predicting that one- and two-year fixed mortgage rates could rise to over 6% in the coming year. However, thus far, no bank has announced any interest rate change in response to the OCR rate increase. Previous changes had prompted some banks to announce changes within 24 hours, however, thus far there has been no response.
RBNZ Governor, Adrian Orr has said that the biggest impediment to the country’s economy is the tight labour market and worker shortage, rather than wage increases. He added that the Reserve Bank was also expecting housing prices to fall by about 15% from November 2020 through to the start of 2023, as retail banks were likely to test borrowers’ reactions to having interest rates rise to 6% or higher. Expectations are that few borrowers will have difficulty continuing to pay their mortgages even at these interest levels.
There is however some concern that the new OCR rate will negatively impact the cost of living crisis. Kiwibank’s chief economist, Jarod Kerr had opined that the new cash rate and intentions to keep increasing it through the year would erode the government’s $350 cost-of-living bonus, spur a fall in housing prices to as much as 15%, and make it a struggle for those that were not on fixed mortgage terms.
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