“This is priced into the market.”
Orr noted the market hadn’t moved in response to the Bank hiking the OCR.
“There was absolutely no splash,” he said.
CoreLogic NZ’s chief property economist Kelvin Davidson said, “The good news for stretched borrowers is that the impact of Wednesday’s decision on mortgage rates doesn’t seem likely to be too significant.
“Floating rates will likely go up again, but only about 10 per cent of loans are on these rates.
“There may also be a bit of upwards pressure on 1-year fixed rates, but it’s expected to be minimal given further OCR increases had already been ‘priced in’, and banks have actually brought down their longer-term fixes in recent weeks.”
The Reserve Bank recognised this situation in its Monetary Policy Statement.
“For the first time since 2008, the mortgage rate curve has inverted. As at 16 February, the 1- and 2-year fixed rate terms had increased by 65 and 45 basis points, respectively, since the November Statement.
“Increases have been smaller in the 3- to 5-year terms, leading to an inversion of the mortgage curve, with some banks even decreasing rates at these longer terms.”
This said, both Davidson and the Reserve Bank recognised about half of mortgage debt was due to be refixed this year.
Meanwhile those with large mortgages, including first-home buyers, would come under particular pressure.
“Many mortgage borrowers are re-pricing to new interest rates that are higher than the ‘stress’ test rates used by banks in recent years to assess loan affordability,” the Reserve Bank said.
“To date, the share of mortgages for which scheduled payments have fallen behind remains very low, likely reflecting that household incomes have also increased during this time. However, this share is expected to increase as the economy contracts and employment declines from very high levels.”
As for savers, the Reserve Bank believed term deposit rates had room to rise.
It noted “deposit rate increases continue to lag the increases in wholesale and mortgage rates, resulting in a further widening of bank margins between lending and deposit rates”.
It said it expected “deposit rates to increase over the coming year, incentivising savings, further dampening inflation and supporting the maintenance of current mortgage rates for a longer period”.
Nonetheless, with demand for mortgages super low (i.e. the value of new mortgages issued in December 2022 was the lowest it’s been in a December month since 2017), banks remain well funded. In December, their core funding ratio was the highest it’s been since data collection began in 2010.
So, banks aren’t under pressure – at the moment at least – to use high deposit rates to attract funding.
Nonetheless, Orr, in the press conference, explicitly said, “We would like to see movements in deposit rates.”
As for the economic storm clouds – the Reserve Bank recognised there was still a significant amount of uncertainty around the impacts of Cyclone Gabrielle and flooding in the upper North Island.
“All else being equal, these severe storms will keep CPI [consumer price index] inflation high for longer and may lead to a longer period with inflation above 7 per cent,” the Reserve Bank said.
“Monetary policy will look through the direct effects of these events on near-term inflation, as they are likely to be temporary.
“The largest risk of higher near-term inflation to the medium-term outlook – and therefore to monetary policy – comes from inflation expectations remaining elevated for longer than otherwise.”
