Borrowers face yet more interest-rate rises this year and next and, if the migration boom is bigger than expected, the hit to household budgets will be even more painful.
The Reserve Bank yesterday increased official interest rates to 3.25 per cent, the third move up this year, pushing short-term mortgage rates up about 50 basis points to around 6.25 per cent.
ANZ immediately moved its floating rates to 6.49 per cent yesterday, with others expected to follow.
For borrowers with an average mortgage of about $250,000, rising interest rates this year are expected to suck about $1000 out of the annual household income, when half of all workers had no pay rise in the past year, according to the Greens.
There has already been a recent big switch from floating rates to fixed-term mortgages as borrowers try to protect themselves from further interest rate rises. Since the start of the year, lending on floating rates has fallen about $10 billion and fixed-rate mortgages have risen almost as much.
That switch may be encouraging the Reserve Bank to keep short-term rates moving up, with an overall rise of about 200 basis points over two years in store.
Another rate rise in July is now seen as an increasing probability, with a clear signal from the Reserve Bank that rates would rise twice more by the end of the year, economists say. That is likely to be followed by three or four more moves up next year and could result in floating mortgage rates eventually heading to about 8 per cent.
Westpac Bank chief economist Dominick Stephens said they expected 25 basis point moves in September and December. But, if anything, the Reserve Bank's statement increased the chance of a rise in July rather than September.
The central bank laid out a track for interest rates to keep rising steadily in the next two years, with little sign of an extended pause this winter, as some economists earlier expected. The Reserve Bank had not been spooked by falling dairy prices, ANZ economists said, which was leaning towards another move up in July.
Bank of New Zealand economists forecast moves up in July, October and December, with no evidence of a near-term pause.
The Reserve Bank said interest rates might not need to rise so much if export commodity prices fall further than expected, but warned rates could rise further and faster if the migration boom became even bigger.
And, it said, it would be futile to try to control migration to cool the housing market.
Net migration is expected to peak about 37,000 a year, according to the Reserve Bank, from an annual gain of about 34,400 now. But if it peaks at 45,000, house-price inflation could spike back above 10 per cent. That could lead to short-term interest rates rising about 50 basis points more than now assumed.
The Reserve Bank admitted it had been surprised about the strength in net migration so it was "on guard" about when a turning point from the peak might come.
When asked whether there was any point in curbing migration, Reserve Bank governor Graeme Wheeler said: "I think you have hit it on the head. It is very hard to fine-tune immigration to meet demand purposes. By the time you make an adjustment, you may well find that the situation has completely changed."
Meanwhile, Greens co-leader Russel Norman said many households faced rising interest rates and prices, while half of all workers had no wage increases in the past year.
"How do you think households are going to respond to these increased pressures on them, from rising interest rates, when they are not getting any wage increases?" Norman asked Wheeler at Parliament's Finance and Expenditure Select Committee hearing yesterday. "They seem to be between a rock and a hard place," Norman said.
Wheeler said wages had not gone up because more people were moving into the workforce, and strong net migration added to the supply of workers.
"But, unfortunately, there will always be a sector . . . that don't enjoy the income growth that others do enjoy," Wheeler said, and this was often linked with long spells of unemployment.
Reserve Bank lifts official cash rate to 3.25 per cent
More interest-rate hikes expected this year and next, with little sign of a pause
Another rate rise in July is probable, with another move by the end of the year
90-day bank bills forecast to rise from 3.3 per cent to 5.3 per cent by 2017
Economy to grow 3.5 per cent in the year ahead
Key drivers: building and strong net migration
Inflation forecast to hit 2 per cent by mid 2015
Rates to keep rising despite the slump in dairy prices and a still-high dollar
The high exchange rate was "not sustainable" and was expected to fall
Interest rates could rise even faster if the migration boom is stronger than the 37,000-a-year peak forecast by the Reserve Bank.
Source: Reserve Bank and bank economists