Liam Dann: Bad news for borrowers as Reserve Bank gets tough on inflation

OPINION:

Okay, first the bad news.

If you already thought your mortgage rate was heading to scary heights then yesterday's tough-talking Monetary Policy Statement just made things worse.

The double - 50-basis-point - hike taking the Official Cash Rate to 2 per cent surprised no one.

But the RBNZ has moved its forecast OCR peak up by 60 basis points - from 3.35 per cent to 3.95 per cent.

The new OCR track implies it could go as high as 3.5 per cent by the end of the year.

And that would mean one or possibly two more 50-basis-point hikes before things settle to more orderly 25bp increments.

On that basis fixed two-year rates are likely to peak well north of 7 per cent, putting the squeeze on vulnerable first home buyers.

Anyway, at least there's ... well, the other bad news.

The Reserve Bank's aggressive commitment to beating inflation will squeeze the economic growth to the point of recession.

RBNZ forecasts stop short of suggesting we'll see GDP actually fall.

They have low points of quarterly GDP growth (at 0.2 per cent) pencilled for the June and September quarters of 2023.

That's ominous timing for the Government which will be heading into the general election.

Orr was cautious not to rule recession out saying the RBNZ was committed to "doing what was necessary" to bring inflation back into line.

He acknowledged the risks but also restated the RBNZ's view that the New Zealand economy was strong enough to handle this inflation-busting rate track.

BNZ head of research Stephen Toplis wasn't shy of interpreting that stance.

The RBNZ was signalling the "necessity of recession", he wrote.

The good news if there was some yesterday was that the Reserve Bank believes all of this pain is temporary.

With the obvious caveat around global conditions, it sees scope for rates to begin falling again by mid-2024.

The other good news is that it might never happen.

Whether we ultimately need to go that high and whether it all flows directly through to retail rates is far from certain.

The OCR might not need to go so high if the aggressive strategy to front-load rate hikes pays off.

The cost of servicing a mortgage is set to rise sharply over the next few months. Photo / Fiona Goodall

ASB senior economist Mike Jones said the "pace and degree of tightening will have consequences for house prices, spending and GDP growth such that we don't think the OCR will need to be lifted all the way to the 3.95 per cent peak the RBNZ's updated projections imply".

"We thought the RBNZ would come out swinging, but [the] statement was even more hawkish than we and financial markets were expecting," he said.

Jones said he expected demand to "buckle" in response to higher rates sooner than the RBNZ forecasts and so ASB has forecast the easing cycle to begin sooner "loosely pegged from February 2024".

In other words it might all work out, but there will be some pain along the way.