A 1% rise in mortgage rates would chew up about 5% of Aucklanders’ and 3% of other New Zealanders’ disposable incomes, warns ANZ NZ Chief Economist Sharon Zollner.
She delivered this “gale force headwind warning” as Reserve Bank (RBNZ) Governor Adrian Orr said it was too early for the central bank to say whether it’s going to do more to try to suppress rising long-term bond yields.
Financial markets have for several weeks been placing increasingly large bets on rising inflation and interest rates.
Zollner noted the RBNZ has kept monetary policy loose, recognising temporary factors, like higher freight costs caused by closed borders, are partly what’s sending inflation expectations up.
By holding the Official Cash Rate (OCR) at a record low and keeping its Large-Scale Asset Purchase (LSAP) Programme and Funding for Lending Programme (FLP) ticking along, the RBNZ is trying to prevent financial conditions tightening.
However, faced with rising bond yields, the Reserve Bank of Australia last week started doubling down on its weekly bond purchases via its version of the LSAP.
Asked, at an economics forum hosted by Waikato University on Thursday, for his response to the situation, Orr said: “We will be assessing how economic conditions unfold and whether we need to be doing anything with our monetary policy stance.
“At present it is far too early to have any concern over what we’ve observed. We’re still in the watching and waiting game.”
So the RBNZ has not - yet at least - opted to go into battle with impatient markets by increasing its bond buying rate to put downward pressure on bond yields.
It’s continuing to buy $570 million of New Zealand Government Bonds from the secondary market a week - less than when it first launched the programme last year.
Speaking to interest.co.nz on Tuesday, RBNZ Assistant Governor Christian Hawkesby reminded markets the RBNZ could increase that bond-buying rate for a time.
Hawkesby said there had been “pockets of dysfunction” in bond markets.
“There is a lot of talk of thinly liquid conditions. So, we do have that optionality; so we can scale up the size of the [LSAP] programme, if we think that would be appropriate,” he said.
Zollner noted much of the liquidity provided by the RBNZ had been gobbled up by mortgages and financial conditions were tight.
She said the $28 billion of cheap funding made available to retail banks by the RBNZ (which remains largely untapped at $1.14 billion) is small in the bigger scheme of things.
She said tightening conditions wouldn’t be a bad thing in terms of slowing mortgage lending growth. But this wouldn't follow the RBNZ’s plan.
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