What happens to mortgage rates, and household spending, if ANZ is right and the RBNZ leans into the sharp-rising inflationary pressures with vigour?

ANZ's latest update to their OCR forecast track has moved interest rate markets.

ANZ now thinks the RBNZ will go hard countering rising inflationary pressures by raising the OCR by +50 bps on April 13, and by another +50 bps on May 25, 2022. That will take the OCR up a full +1.0% in just the next eleven weeks to 2.0%. The details of ANZ's opinion change are here.

Markets respect ANZ's opinion.

Interest rate markets hadn't assumed such a sharp, quick double rise. After the ANZ opinion release, they bid up wholesale swap rates, the key rates that drive fixed home loan rates.

If these shifts higher hold, then it is likely that home loan rate cards will rise.

When the OCR was at 1.0%, the one year fixed rate was about 3.85%. The two year fixed rate was about 4.35%.

The immediate impact of the changed ANZ opinion was to add +14 bps to an already rising one year swap rate, taking it to 2.44% and its highest since March 2016. In March 2016 the average big bank one year mortgage rate was 4.37%.

The latest ANZ opinion added +13 bps to the two year swap rate, taking it to 2.91%, its highest since July 2015. In July 2015 the two year fixed mortgage rate was 4.79%.

If there were no more wholesale rate changes, that would add +60 bps to the one year rate and +40 bps to the two year rate cards.

But the chances are that if the markets become convinced the RBNZ is serious about fighting inflation and there is a +100 bps rate in the next 76 days, those rates will go much higher. We need to watch out for market conviction levels. The next week or two will set the tone.

It is not out of the question of getting 100+ bps rises between now and May.

Inflation expectations need to be fought. But with so much of the latest impetus coming from the tradables sector, the pressure on the local economy will be high. And this current local economy is not in great shape at present. On the surface it is running ok but many private firms are in brittle shape, especially SMEs. No pressure release looks like it is coming for households in the form of tax relief, even though the tax take is running at record levels. In fact, there seems little appetite for lower taxes among many voters; they appear to want larger transfer payments instead.

Sharply higher home loan payments will eat away at household budgets. The first, immediate pressure is on commuting costs from leaping petrol prices. Food prices are an immediate pressure point too. But the expectation that the next mortgage rate rollover will bite hard will loom large in home-owning household decision-making.

A 100 bps mortgage rate rise will take $62 per week out of spending for a $450,000 mortgage. It will take $140 per week out for a $1 mln mortgage. At either level any household will notice it especially as it will be on top of petrol and food increases.

Sharp belt-tightening will induce lower demand (which is what an OCR increase is all about), but in the current situation if could easily also bring on recession. Certainly, housing sellers won't find as many buyers. Meeting the market will likely mean lower house prices in the lower quartile markets. Diving auction success results show that pressure is already upon us.

If the RBNZ moves as ANZ expects, the advantage of being a borrower will fade. The disadvantage of being a saver however may not be as great, as the tables turn.

If the RBNZ puts off tackling the building inflationary impulse, financial markets are unlikely to be respectful of that decision. That disrespect may not show up only in wholesale rates, but in the exchange rate as well, exacerbating inflationary pressures. After all, with persistent current account deficits, foreign creditors have an outsized say in these settings.