Mortgage pain time: OCR rises to 2.75 per cent

23:45, Mar 12 2014

The Reserve Bank is lifting official interest rates from 2.5 per cent to 2.75 per cent, kicking off what is expected to be a long run of rate rises, pushing up floating mortgage rates over the next two years.

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In its Monetary Policy Statement out this morning, the Reserve Bank said the Official Cash Rate would need to rise "about 2 percentage points" over the next two years to keep inflation in check. The next rise is expected in April.

Floating-mortgage rates are now about 5.75 per cent, but could rise to about 8 per cent in the next couple of years, or more, if the Reserve Bank moves the official rate as much as expected.

Some economists say borrowers could face rises of as much as 150 basis points this year alone, with more to follow in 2015.

If the official rate rises 1 percentage point by the end of this year, that will add another $20 a week for a family for each $100,000 they borrowed, the economists say.

"The speed and extent to which the official cash rate will be raised will depend on economic data," the central bank said, pointing to a stronger economy and concerns about rising inflation in future.

Speed limits on low deposit home loans from last year had cooled the housing market, and rising interest rates would add to that "moderating influence", offset by rising migration, the central bank said today.

But after a period of low interest rates and still-high household debt levels, there was "more uncertainty than normal about how households would respond to rising interest rates" the central bank said.

New Zealand is the first developed country in the world to lift interest rates in recent times, although economists say that is already factored in to the high New Zealand dollar.


The currency was at US84.7 cents late yesterday, and was trading between about US85c and US84.37c immediately after the Reserve Bank's announcement. 

Prime Minister John Key has acknowledged that homeowners will be hit in the pocket by the interest rate rise introduced by the Reserve Bank this morning.

But he said the rate rise was the result of a strong economy.

"It's true we are the only developed country in the world that's currently raising interest rates, but that's because we are growing at a faster rate than most other countries around the world and we've got a very robust outlook," he said.

"So while I think there will be some disappointment and frustration from homeowners, on the other side of the coin they can take real confidence that the strong economy will underpin good job opportunities and probably wage growth over time."

Interest rates could not stay at historic lows forever, he said.

There was little that could be done to combat the high dollar, he said, apart from being careful about government spending.

Economists say higher interest rates are needed to head off inflation pressures and to moderate demand for housing in Auckland.

And rate rises are expected to "pack a punch," economists say, with most outstanding mortgage lending on floating or short-term loans.

That means hikes will be passed straight through to borrowers.

Higher interest rates will temper household spending and business investment.

Some economists have recommended borrowers shift some of their loan to a three-year term now at about 6.35 per cent interest.

A large proportion of people are on floating or short-term mortgages, but the tide has started turning as more borrowers look for fixed-term rates to shelter themselves from expected rate rises. A swift rise in rates could prompt a rush for fixed rates.

Many first-home buyers who have been squeezed out of the market by Reserve Bank low-deposit loan rules imposed last year, will face much higher interest rates by the time they have saved a bigger deposit.

The Official Cash Rate has been at an extreme low of just 2.5 per cent since early 2009, apart from a small lift in 2010 that was reversed in early 2011. That has seen mortgage rates at their lowest levels for about 50 years, in the wake of the global financial crisis.

In December, the Reserve Bank signalled that the interest rate would rise 200 basis points to 4.5 per cent by the end of 2015. That would see rates around "neutral" levels, neither speeding up nor slowing down the economy.

But some economists say the cash rate could top 5 per cent by then, pushing floating mortgage rates to about 8.5 per cent.

In the last period of extended interest-rate rises before the global financial crisis, the Official Cash Rate peaked at 8.25 per cent in 2007, with average floating mortgage rates at almost 11 per cent.


Today's Monetary Policy Statement made little mention of the high New Zealand dollar, other than to say it was "not sustainable in the long run".

Economists have said that rising interest rates were already factored into the level of the dollar, so today's widely expected interest rate move should not see any big move in the currency.

The Reserve Bank said the economic expansion now had "considerable momentum" and growth had become more broad-based. The economy was estimated to have grown 3.3 per cent in the year to March.

The past long period of low interest rates dating back six years to the Global Financial Crisis, and strong growth in building had supported the economic recovery.

"A rapid increase in net immigration over the past 18 months has also boosted housing and consumer demand," the central bank said. Consumer and business confidence was high and plans to hire more staff and invest were still rising.

And growth was improving among New Zealand's main trading partners.

Growth in demand had been absorbing spare capacity in the economy and inflation pressures were becoming "apparent", especially in the domestic sector. Weak import prices and a high dollar had held down inflation for traded goods.

But the Reserve Bank said it did not think the current level of the dollar was "sustainable in the long run".


The Reserve Bank said it would increase the official cash rate "as needed" to keep average future inflation near to the target mid-point of 2 per cent, to make sure economic expansion could be sustained.

The Reserve Bank's assumption for the next couple of years sees short term interest rates rise slightly more than expected in December, with 90-day bank bills moving up from 2.8 per cent to 5.3 per cent by early 2017, an increase of about 250 basis points.

The assumption is greater than in December's Monetary Policy Statement, which predicted 90-day rates to rise about 200 points, though over a slightly shorter period.

The Reserve Bank said there had been some "moderation" in the housing market, though national average prices have risen 9 per cent in the past year.

The speed limits on low deposit home loans brought in during October last year were starting to "ease pressure", in line with expectations that the restrictions would subtract between 1 per cent and 4 per cent from annual house price inflation in the first year. Recent housing figures suggested the impact of that may have been stronger than expected when the moves first came in.

"And rising interest rates will have a further moderating influence," the bank said.

Overall, headline inflation so far had been "moderate", at 1.6 per cent, but inflation pressures were rising and were expected to keep doing so over the next two years.

To keep inflation expectations in check, interest rates would need to rise towards a level where they were no longer pushing the economy forward, adding to demand.

"The Bank is commencing this adjustment today," the Reserve Bank said.