The Reserve Bank (RBNZ) has raised the Official Cash Rate to 0.75% from 0.50% in a move that was widely expected in the face of the inflationary pressures and tight labour market the country is seeing.
Significantly for the financial markets, the RBNZ raised the 'forward track' of OCR forecasts contained in its latest Monetary Policy Statement (MPS) to show the OCR now peaking at 2.6%, reaching that level in late 2023 and remaining there through 2024. This is up from a peak of 2.1% in 2024 as per the August MPS.
Pricing in the wholesale interest rate markets has been running ahead - and had reached levels more akin to an OCR of about 3% and there was a quick reaction to the OCR announcement, with swap rates recording falls of over 10 basis points. The two-year rate fell from 2.4% to 2.24%.
The RBNZ is forecasting the OCR to hit 1.5% by June next year - which suggests that the rate will be hiked at each of the next three RBNZ reviews, assuming only 25 basis point hikes are deployed.
The New Zealand dollar actually fell by nearly half a US cent to just above US69c, suggesting some disappointment in the markets that the RBNZ had not been more aggressive and lifted the OCR to 1% - as some had been suggesting.
In commenting on the hot conditions in the economy that are prompting the upward interest rate moves, RBNZ Governor Adrian Orr said "capacity pressures" had continued to tighten.
"For example, employment is now above its maximum sustainable level. A broad range of economic indicators highlight that the New Zealand economy continues to perform above its current potential," he said.
The central bank said CPI inflation (which recently hit 4.9% for the September quarter) is expected to measure above 5% (the exact forecast is for 5.7%) in the near term before returning towards the 2% midpoint over the next two years.
Wednesday's raising of the OCR follows a rise last month, which was the first increase since the OCR had been dropped to the emergency setting of 0.25% as the pandemic crisis hit in March 2020.
While the RBNZ has increased the OCR only twice so far, the financial markets have picked up the story of inflation and the need for higher rates and well and truly run with it, and we've seen wholesale interest rates spike sharply higher, leading to substantial increases in mortgage rates.
Further mortgage rate rises can now be expected.
In the record of the RBNZ Monetary Policy Committee meeting released on Wednesday the RBNZ said the committee had discussed how much monetary stimulus needed to be removed over the next 12-18 months to meet their price stability and maximum sustainable employment Remit.
"The Committee expected that the OCR would need to be progressively increased and, conditional on the economy evolving as expected, the OCR would likely need to be raised above its neutral rate," the RBNZ said.
"The Committee discussed how fast interest rates need to be increased, taking into account primary and secondary objectives of its Remit. Higher starting point inflation and capacity pressures, and the risk that higher near-term inflation becomes embedded in price setting behaviour were discussed as factors arguing for a more rapid removal of monetary stimulus.
"However, the Committee expressed uncertainty about the resilience of consumer spending and business investment as the country adapts to living with the COVID-19 virus in the community. The Committee also noted that increases in interest rates to households and businesses had already tightened monetary conditions. High levels of household debt, and a large share of fixed-rate mortgages re-pricing in coming months, could increase the sensitivity of consumer spending to these interest rate increases.
"Weighing these factors, the Committee assessed risks to their price stability and maximum sustainable employment objectives as being broadly balanced over the medium term. The Committee judged that considered steps in the OCR were the most appropriate way to continue reducing monetary stimulus for now."
Reference was made to the large scale asset purchase scheme the RBNZ began last year and which is currently on hold with about $53 billion worth of bonds having been purchased.
"The committee expects to gradually manage LSAP bond holdings down, in a way that maintains the smooth functioning of financial markets. More details on how bond holdings will be reduced will be provided early next year," the RBNZ said.
This is the statement from the Reserve Bank:
The Monetary Policy Committee agreed to raise the Official Cash Rate (OCR) to 0.75 per cent. The Committee agreed it remains appropriate to continue reducing monetary stimulus so as to maintain price stability and support maximum sustainable employment.
The level of global economic activity continues to rise, supported by accommodative monetary and fiscal policy settings, and the relaxation of COVID-19 health-restrictions. The pace of global economic growth has ebbed however, due to the elevated uncertainty created by the persistent COVID-19 virus.
Global supply-chain disruptions are causing both cost pressures and constraints on production, at a time when consumer demand remains strong. Central banks globally face the challenge of distinguishing between transitory price increases and underlying sustained inflation pressures to assess the need for, and timing of, reductions in the level of monetary policy stimulus.
New Zealand’s public health restrictions are easing as the country transitions into the COVID-19 Protection Framework. The framework will enable greater mobility of people, and goods and services. With the easing of restrictions, it is anticipated that the COVID-19 virus will become more widespread geographically, albeit manageable for health authorities and less harmful for those vaccinated. However, household spending and business investment will be dampened in the near-term by these ongoing health uncertainties.
The recent nationwide health-related lockdown, the more prolonged restrictions in Auckland, Northland and the Waikato, and the continued ‘Level 2’ restrictions elsewhere, resulted in a sharp contraction in economic activity. Despite these lockdowns, underlying economic strength remains supported by aggregate household and business balance sheet strength, fiscal policy support, and strong export returns.
Capacity pressures have continued to tighten. For example, employment is now above its maximum sustainable level. A broad range of economic indicators highlight that the New Zealand economy continues to perform above its current potential.
Headline CPI inflation is expected to measure above 5 percent in the near term before returning towards the 2 percent midpoint over the next two years. The near-term rise in inflation is accentuated by higher oil prices, rising transport costs and the impact of supply shortfalls. These immediate relative price shocks risk generating more generalised price rises given the current domestic capacity constraints.
The Committee noted that further removal of monetary policy stimulus is expected over time given the medium term outlook for inflation and employment.
This is the record of the Monetary Policy Committee meeting
The Monetary Policy Committee discussed economic developments since the August Statement. Global economic activity continues to recover, as public health restrictions ease and COVID-19 vaccine rates increase. However, the near-term outlook for global growth has weakened somewhat because of the continued spread of the Delta variant and related disruptions to production.
Global inflation has increased due to the rapid recovery in global demand combined with significant supply chain bottlenecks and labour shortages in some sectors. An ongoing boost from government spending and monetary policy stimulus in many countries is adding to strong demand. There is considerable uncertainty about the persistence of global inflationary pressures.
The New Zealand economy was in a strong position before the national lockdown in August, supported by resilient household spending, strong construction activity, and demand for our key dairy and meat exports. This had more than offset ongoing weakness in hospitality and sectors reliant on international tourism. While public health restrictions to control the spread of the Delta variant will result in a slowdown over the second half of the year, Government support for business and jobs has helped the economy weather the impact. Nevertheless, some customer-facing businesses in Auckland and a range of service sectors are suffering acute stress.
The Committee noted that the economy is expected to recover as public health restrictions are eased as the country moves into the COVID-19 Protection Framework. However, the Committee discussed the risk that consumer and business confidence weakens as COVID-19 becomes more widespread across the country, dampening household spending and investment in the near term.
Despite recent lockdowns, capacity pressures in the economy have continued to tighten. Employment is now assessed as being above its maximum sustainable level. Measures of labour market slack such as unemployment and underutilisation are at their lowest levels in over a decade. This has been reflected in stronger aggregate wage growth, albeit below the rate of CPI inflation.
The Committee discussed the outlook for net migration and how this could affect labour supply. For example, it is currently easier to leave New Zealand than arrive, so there could be a net loss of labour in the near term. There will be ongoing uncertainty as to the relative impact net migration will have on overall supply and demand in the economy.
Rising capacity pressures have led to an increase in domestic inflation. At the same time, continued bottlenecks in global and local supply chains and further increases in global oil prices have added to inflationary pressures. Annual CPI inflation has increased to 4.9 percent in New Zealand, above the Committee’s 1 to 3 percent Remit target band. Measures of core inflation have also increased into the top half of the target band. The Committee noted that inflation is expected to remain high in the near term, and return to the midpoint of the target band over the next two years.
The Committee assessed that near-term risks to inflation are skewed to the upside, and discussed the risk that higher near-term inflation could become embedded in price setting behaviour. The Committee noted that near-term inflation expectations tend to move with actual inflation. Medium-term measures provide a better gauge of whether inflation expectations remain anchored, and these remain close to the target midpoint.
The Committee discussed the Reserve Bank’s assessment that the level of house prices are unsustainable. Members noted that higher mortgage interest rates, continued strong home building, tighter lending rules and changes in tax settings should all act to moderate house prices over the medium term. The Committee discussed the risk that house prices could keep rising in the near term, increasing the risk of a sharper fall later. Continued increases in the OCR are expected to support more sustainable house prices.
The importance of overall monetary conditions was considered by the Committee, including medium-term borrowing rates for households and businesses, to achieving its price stability and maximum sustainable employment objectives. In 2020, additional monetary policy tools were used to support the economy by further lowering interest rates when the OCR was near zero. The Committee agreed that higher interest rates are now needed to maintain price stability and maximum sustainable employment, and that the OCR remains their preferred tool to do this.
The Committee noted that the Large Scale Asset Purchase (LSAP) programme provided significant monetary stimulus and supported bond market functioning through 2020 as the Reserve Bank bought government bonds as an additional monetary policy tool. As bond market functioning has improved, the impact of the LSAP programme on monetary stimulus has fallen, and it is assessed that current bond holdings are providing a small amount of ongoing stimulus.
The Committee expects to gradually manage LSAP bond holdings down, in a way that maintains the smooth functioning of financial markets. More details on how bond holdings will be reduced will be provided early next year.
The Committee discussed that funding remains available to banks under the Funding for Lending Programme (FLP) until the end of 2022, as another part of the Bank’s additional monetary policy toolkit. The programme provides banks with assured access to some medium-term funding at the OCR. This commitment has been factored into banks’ funding plans. Any adjustment to the terms of the programme would increase funding and operational risks for banks, and would undermine future effectiveness if a similar programme is required in the future. The Committee agreed that changing the terms of the programme would not be consistent with its risk appetite.
As the OCR is increased, the cost to banks of borrowing through the FLP will rise, helping to remove monetary stimulus. Since banks have provided assets as collateral to access funding under the FLP, the scheme does not pose material financial risk to the Crown.
The Committee discussed how much monetary stimulus needed to be removed over the next 12-18 months to meet their price stability and maximum sustainable employment Remit. The Committee expected that the OCR would need to be progressively increased and, conditional on the economy evolving as expected, the OCR would likely need to be raised above its neutral rate.
The Committee discussed how fast interest rates need to be increased, taking into account primary and secondary objectives of its Remit. Higher starting point inflation and capacity pressures, and the risk that higher near-term inflation becomes embedded in price setting behaviour were discussed as factors arguing for a more rapid removal of monetary stimulus.
However, the Committee expressed uncertainty about the resilience of consumer spending and business investment as the country adapts to living with the COVID-19 virus in the community. The Committee also noted that increases in interest rates to households and businesses had already tightened monetary conditions. High levels of household debt, and a large share of fixed-rate mortgages re-pricing in coming months, could increase the sensitivity of consumer spending to these interest rate increases.
Weighing these factors, the Committee assessed risks to their price stability and maximum sustainable employment objectives as being broadly balanced over the medium term. The Committee judged that considered steps in the OCR were the most appropriate way to continue reducing monetary stimulus for now.
On Wednesday 24 November, the Committee reached a consensus to increase the OCR to 0.75 percent.
109 Comments
There is no pain. It's chimp change.
You just see how people will go after houses like flies go in shit.
NZ is obsessed with houses and no matter the price, they will buy. I bet prices will be another 20% higher by Xmas. Just buy now or be left behind.
There is going to be a big rush. So if you wait, you loose.
Who cares about interest rates, we have a government which will save us when shit hits the fan. They paid all business for last two years. They would do the same for house buyers. Don't ya worry. Keep buying at auctions. Just bid your fellow kiwi out.. Make sure you win, no matter the price.
CCY market a little disappointed by the magnitude given the pricing across a part of the forward curve a little higher. Having got that increase out of the way it is now a long time between drinks. Still the RBNZ has a cash rate that over the summer holidays should see the NZD find some support perhaps at lower levels
Interesting to note their Trade Weighted Index (TWI) forecasts are flat - just goes to show no one really knows where the CCY is headed
Brilliant their house price forecasts today include negatives (-19% Jun 23 to Dec 24) yet their modelling in yesterday's debt servicing restrictions framework only had positive numbers?
in other words the banks have already done our job so as we don't want o be the bad guys we will do the minimal amount possible.
Orr had better hope the steady as she goes works - because the possibility of hyperinflation followed by stagflation is a very real possibility if he cant ease demand in the short term.
A pathetically weak response from the RBNZ. The financial markets look to you for strong guidance on this - not dereliction of your duty to others. Clearly Adrian prefers to kick the inflation can down the road which is now structural rather than transitory in New Zealand.
Yes 0.75 with the current inflation and unemployment is still extremely low. However the banks seem to have a disconnect to the OCR now, effectively operating by traditional margins to a 1.5% OCR already. RBNZ not really the driver at the moment, they are too far behind the market.
The central bank sets the price of money.
The central bank reset the Overnight Cash Rate today.
Moreover,
Reserve Bank of New Zealand just comes right out with it:
"Studies found the government bond purchases worth 10 percent of GDP have, on average, lowered 10-year government bond yields by around 50 basis points."
Underwhelming, isn’t it? Pitiful, actually. Link
LOL. The RBNZ are still utterly delusional.
They have increased the OCR peak forecast, from the August MPS's estimate of 2.1% to a slightly more realistic 2.6%. But they are still way off the mark and they will have to increase their forecast again.
The only reason why they have not been honest about it is that were not keen on admitting that their August's MPS forecast was completely wrong. Swap rates are already forecasting an OCR peak at or over the 3% level, and I bet that this is the new figure that they will come up with when they issue the next MPS.
Actually, I would not be surprised if the actual OCR peak gets closer to 4% than 3%, and this further increase would be simply caused by the gross negligence of the RBNZ in raising rates too slowly. They prefer to lose credibility and let the swap markets decide for them, rather than take decisive action.
Depends what time horizon you are looking at.
Not much has changed in the economy other than more debt. Yes the labour market is tight but you can guarentee they will open the flood gates to immigration shortly to keep the ponzi going. More houses, more people, more debt. Once supply chain clears out and immigration cranks up we will be back to the same ol story we have had the past 20 years. Inflation lower and lower and rates will follow. More debt means less spending and high prices get regected. Also QE around the world gives short term liquidity and then it kills velocity. I dont understand why people cant see this story. It is so clear that most advanced economies are going the way of Japan. Yes the OCR will go higher in the short term. Then spending will dry up everything will slow down and rates will eventually crash again. Same thing for the past 20 years. Also tack on all the baby boomers retiring at record pace.
A question to those older and wiser than me (which is just about everyone, to be fair) - how aggressively should one be paying off the mortgage at the moment?
I'm lucky enough to be in a position where I can pay off 50% of my mortgage at the start of 2022 - at the expense of wiping out my savings down to no more than a six month emergency fund.
Should I go "all in" or should I be a bit more measured in paying off the mortgage?
I appreciate that conventional wisdom would dictate maybe paying a bit extra, but investing the rest (as in the long term that invested $$$ should provide a greater return).
However, I'm self-employed so the idea of having as much of the house paid off as possible is nice, as a buffer against whatever might come.
Any advice appreciated.
I'm lucky enough to be in a position where I can pay off 50% of my mortgage at the start of 2022 - at the expense of wiping out my savings down to no more than a six month emergency fund.
Well according to ASB, only 1/3 of people have >$10K in savings. 50% have <$1K.
I know you're trying to express 'I'm alright Jack' and that's understandable. But remember if the majority of the sheeple barely have two sticks to rub together, it can affect you.
That isn't my intent at all. I know I'm in a privileged position compared to many in society.
I'm good at the work I do, and make decent money from that. But I'm not knowledgeable on finance, investing or anything of that nature. I am a simple person, for want of a better word.
I come here for two reasons - to argue about Covid restrictions on the Breakfast Briefing, and to learn more about financial matters.
I know a lot of people read/lurk here who have a lot of experience and knowledge, and want to get some advice from those smarter than I on these matters.
I completely agree that if the economy goes south for "Joe average" that will have an effect. That sort of risk is part of the reason I asked my question.
Not that any of this is financial advice BUT what is your current mortgage structure? As always the advice of balancing your baskets and eggs is king but the extent to which you weight paying down/investing/holding cash buffer depends on your risk tolerance and your costs elsewhere other than the mortgage. :)
I completely agree that if the economy goes south for "Joe average" that will have an effect.
Lord Key was shocked when he found recently that people had so little cash savings. He's on the board of a business and he doesn't even understand the majority of his own customers.
Assuming that 50% is represented by cash in the bank and not liquid assets, I would suggest two things to start: 1) use the mortgage calculator on this site to compare your servicing costs at different interest rates, and 2) ask yourself what is the opportunity cost of that cash? e.g. if you invested that money into your business, could you get a better return on capital?
I'm assuming the property in question is Owner occupied ie you cant claim interest as a tax deduction.
If the answer is yes- then pay off as quickly as possible. Like rent Interest is wasted money (u8nless it is tax deductible - and even then ???).
The only exception to this is if you can get a decent managed fund returning more than 6% per annum (net - given most fees are roughly 1%- you want to be retruning roughly 7%)- although even thats risky because share market returns will stall once global interest rates start rising.
FWIW I have a mortgage; have done for 8 years now, and it's been 100% OffSet since Day 1. I got it because The Banks were dead-keen to shovel debt out the doors at that time. The Lending Rules were much more relaxed, and just having the deposit was enough to secure any loan.
Why don't I just pay it off? Liquidity.
Paying off any loan is the easy bit, if you have the funds to do so, but re-borrowing in the future if you need to, may not be as easy.
If property prices correct, what will be your new borrowing capacity? 80% of, say, $1,000,000 or 80% of $500,000?
For mine, if you have the willpower, just sticking it in an OffSet Account (it costs nothing) is a valid option, as you may need it at some crucial stage, and it's already 'borrowed'.
BW's Rule Number 1 - "Never give the funds back if you don't have to!"
Agree- it beggars belief Kiwis dont take more advantage of offset loans - when we bought our house earlier this year we borrowed 500K - even though we only needed 50K. The rest of the money sits in the offset account and we pay interest on 50K- if we want to renovate or buy a new car or take a holiday, or even take 6 months off work we have cash available to do so
Hi dumbthoughts, it's great to see someone using this forum in a constructive way. My advice, pay off as much as you can on your mortgage. Reasons,
1) paying off your mortgage early saves you more than you think because of the compounding effect of money owed.
2) I don't know when your mortgage comes up for renewal but I assume soon, it will be more expensive than now (unless you fixed for a long term 3 - 5 years ago)
3) If you mortgage renewal will be let's say 5% it means you would need to earn a pre-tax return of 7.5% if you invested your money instead of repaying the mortgage, just to be even.
Repay your mortgage asap, you won't regret it and you'll be financially better off
Number 3 is the key here. Higher interest rates make it much more difficult to make an equivalent return elsewhere without taking bigger risks.
Personally I have a ~50/50 split between mortgage overpayments and investments elsewhere (mostly shares), just for the sake of diversity.
I am always in the pay the mortgage off faster camp. Two main reasons.
1. A house is not an investment, it is security, stability, and shelter. If things go bad, you will want to keep it.
2. Interest on the Mortgage must always be paid. Return on Investments may not.
My advice is to smash the mortgage with the most you can pay off. Pay the mortgage as frequently as the bank allows be it weekly or fortnightly, do not pay it once a month. I had a $255K mortgage to start with and most of that was on 8.6% interest on a single average income. Plenty of time to have some money in the bank when your older.
Ditto. Being freehold is liberating. No matter what happens thereafter you know you'll be ok. Made redundant? No sweat, pick up any job and you can cover food and utilities. Knowing your not beholden to a bank or employer is a great feeling. A lot of folks are sweating at night....mortgage, car on tick, private schools, keeping up with the Jones's. Screw that.
Due to professional obligations I am unable to offer you advice, however I will say that personally I have rarely felt as secure and happy as the day I paid off my mortgage and told the bank to shove the security they held over my home where it hurts most.
Sadly I am mortgage-encumbered again now, but in my "forever home" so at least I know this time will be the last.
Hmmm, interesting. I sold my house last year, I wanted to keep the mortgage but the bank wouldn't let me because of "Covid risks". I repaid my full mortgage and I was truely miserable because I knew I could do so much better with borrowed money. Thankfully I bought another house earlier this year, now I have a nice mortgage again and I'm all happy!
The offset is great for the self employed, if disciplined. I have cash sums and as self employed I use an offset account, why, liquidity, if my self employment is disrupted ..I require money for options and time - offset is the best structure for it regardless where in the economic cycle.
Psychologically, I pay a higher monthly amount off the mortgages and I increase investments/cash reserves monthly.. nothing focused the mind better in have debt to pay off..yet when you have liquid reserves..nothing worse than seeing it reduce :)
I do realise this is a little different than conventional advice...but it provides a lot of flexibility and I find keeps the motivation high.
Presume it's your own home we're talking about not an investment property. Hard to give advice without knowing full picture, your age, goals etc.
You could put your savings against the loan in an offset facility or reducing line of credit.
Then it's still on hand if you need. Albeit the reducing line (sinking lid) facility would've decreased slightly. This is what I'd always suggest self employed people do.
Always a good move to pay off your own home for sleep at night factor and for tax efficiency. Unless you can invest that savings for significantly better return with less risk than putting it on your own loan then reducing your own loan is worth doing.
Banks need to bring rates in line with the RBNZ's direction ASAP - they have hiked mortgage rates too much in the last 3 months (almost doubled them in some cases) and have vastly overstepped their mark. A few months ago when the OCR was at 0.25% mortgage rates were between 2-3%. The OCR has risen by just 0.50% since then and mortgage rates now between 4-5%, it's unbelievable.
Interesting - in the USA, you can get 20 year fixed home loans at an interest rate of 2.875%pa, how are they keeping their rates so low when inflation in the US is higher than NZ currently and that banks have the confidence to offer such low interest rates over such a long term?
https://www.usbank.com/home-loans/mortgage/mortgage-rates.html
I feel more sorry for those who are not in the housing market yet. Those FHB who still weren't able to buy will now find it impossible to buy anything with these interest hikes. People keep hoping the housing prices will crash are dreaming. I've been hearing this for the last 20 years, and the only "drop" I have seen is back in the 2008 crash (which btw a few years later it recovered and surpassed those valuations as well).
Total joke. They cannot even predict the market in Feb 2022 and now they are trying to tell you what it will be in 2024 ? its hilarious. At this rate of inflation the OCR will need to be 2% in Feb 2022. The banks are moving it up regardless, got your Orr stuck in the mud mate ?
Someone posted a link to an article about why not the other day linking to I think a US article asking exactly that. Basically the crux was banks are in risk management mode now, it's not bau and that's why td aren't going up. At least that's how I understood it.
Buy some bank shares I reckon. All those massive loans paying higher rates = gold.
We are a very rare breed my friend. I was interested to read of Shamubeel Eaqub sharing our view, totally against the tide of all other economists.
For me it's less about more covid lockdowns - although that's part of it, and that was one of Shamubeel's key points - but more about the sensitivity of the property economy of NZ to rising interest rates. It will tip over, and that will demand OCR cuts at some point in the next 12-18 months.
And then, I haven't even mentioned overseas crises...
Oh well, we'll see if us in the very small minority are right or wrong over the next 18 months!
Bought to upgrade the current OO home, 3 kids now and we bought it before the market off a developer so we could sell now, pay taxes and come out with a small profit. Paid deposit early this year with title not due til mid 22, so looking into 23 for build to complete. We would also have to sell our current OO with possibly a long settlement to get our hands on some money to get the build done/started. one income currently, 3 kids and bank tightening lending, rates shooting up etc.
"For example, employment is now above its maximum sustainable level."
Says who? What in his view would the 'sustainable' level be I wonder? he is presumably referring to NAIRU-the non-accelerating inflationary rate of unemployment. Let's say he thinks it should be 4%, he is in effect saying that for the economy to function at an optimal level, 4% of the workforce Must remain unemployed.
At a human level, that is surely unacceptable and at the economic level, it is surely just wrong. Unemployment levels have been falling for years without any resurgence in inflation.
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