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Reserve Bank (RBNZ) deputy governor Christian Hawkesby says the central bank is “comfortable” where mortgage rates are currently at.
“We feel those one- to two-year fixed mortgage rates are appropriate at the moment to provide the level of restriction we need in the economy,” Hawkesby told the Herald.
These ratesare typically between 6.5 and 7.5 per cent, with some banks offering rates slightly lower or higher.
Hawkesby said the RBNZ was confident its decision to lift the official cash rate (OCR) to 5.5 per cent on Wednesday would support these popular shorter-term rates staying where they are “for a while” to get inflation back to target.
The RBNZ has lifted the OCR by a lot, and quickly, since late-2021 in a bid to reduce economic demand to get inflation back within its 1 to 3 per cent target range.
The OCR is one of a few key factors that influence how lenders set mortgage rates. Floating mortgage rates and those with shorter durations are typically more closely correlated with the OCR than longer-term rates.
“We’re in a position where we can watch, worry and wait for a while from here. So you would anticipate a period of stability,” Hawkesby said.
The RBNZ expects it will keep the OCR at 5.5 per cent until the second half of next year, when it’ll start bringing it down to a less contractionary level.
With many mortgage holders yet to refix their mortgages and feel the pinch of higher rates, the full effects of tight monetary conditions are yet to be felt across the economy. Photo / Ted Baghurst
Asked whether the RBNZ would be comfortable if banks started cutting mortgage rates in coming weeks or months, now that the RBNZ has signalled it’s likely done hiking rates in this cycle, Hawkesby wouldn’t give a yes/no answer, but said, “We’re comfortable with the level of restriction that we’ve got... Whether those rates move around is going to depend on how much confidence the market has that we’ll have the OCR on hold. It does come back to that message that we’re providing.”
While some economists believe the RBNZ will in fact have to lift the OCR one or two more times to kill off high inflation, swap rates and wholesale interest rates (which rose on the back of the larger-than-expected Budget) dropped right off following the RBNZ’s rate decision. Markets were surprised by how confident the RBNZ was that it’s getting on top of inflation.
ASB announced a lift to its floating mortgage rate just as the RBNZ unveiled its decision. The next day, Westpac said it would lift some shorter-term rates. As of Friday afternoon, other major banks were yet to make changes.
If using the average historical difference between swap rates and mortgage rates as a barometer for where mortgage rates might go, you could guess shorter-term rates could come down a bit, and longer-term rates stay where they are.
ANZ senior strategist David Croy commented on the RBNZ’s comfort with existing monetary conditions.
“They want to survey what’s around them; what’s going on,” Croy said, saying the hurdle for changing settings was now pretty high.
“They would probably need to see a pretty dramatic shift [in economic conditions to change the OCR].”
Croy believed that rather than act on a particular data set, or data based on changes over, say, a month, the RBNZ would observe a body of data over the next three to six months.
Hiking the OCR by 525 basis points in less than two years is substantive. And with many mortgage holders yet to refix their mortgages and feel the pinch of higher rates, the full effects of tight monetary conditions are yet to be felt across the economy.
