Bernard Hickey: Effects of raised OCR

Anyone relying on rises in house prices should think again as rising mortgage rates suck the life out of consumer spending. Photo / NZ Herald

Now that the dust has settled from the Reserve Bank's widely expected decision to put up the Official Cash Rate (OCR) to 2.75 per cent, it's worth looking at what this week's events will mean for mortgage borrowers and term-deposit savers.

Governor Alan Bollard was at pains to say the decision was no big deal. The rate increase was small and from a record low base.

But the forecasts that came with it show that borrowers and savers alike should prepare for a rise in interest rates within the next two to three years.

Now the tightening cycle has begun, New Zealanders can start planning ahead with more certainty, making decisions on home buying, debt repayment or saving.

The Reserve Bank doesn't say exactly when or how much it will increase the OCR, but it does publish its forecast for the 90-day bank bill rate.

That rate is usually around 30 basis points above the OCR, so it gives a fair idea of where it thinks the OCR will be. The bank forecasts the 90-day bill rate will rise to around 6.1 per cent by the end of 2012 from around 2.9 per cent now.

If the OCR rises in tune with that, floating rate mortgage borrowers should expect their rate to rise to about 9 per cent. Some may then choose to fix for two years or more at current rates around 7.3 per cent. But that isn't necessarily the cheapest choice, as floating rates are still around 6 per cent.

Floating rates would need to rise fast to well over 9 per cent to make it worthwhile to stay on a two-year fixed rate at 7.3 per cent. However, some may still choose the peace of mind of knowing what their payments will be for the next two years.

Term depositers are in a much happier position. Rates are well above the OCR and specials can often be found because the banks are keen to secure long-term and local funds.

That hunger for term deposits is, if anything, going to get stronger as banks are forced to raise more of their funds from local sources.

If those current margins of 200 basis points over the OCR rise even further, it's possible bank term deposit rates could be well north of 8 per cent by the end of 2012.

The implications for the economy are ominous for some. Anyone relying on rises in house prices should think again as rising mortgage rates suck the life out of consumer spending.

Anyone with a $200,000 mortgage faces extra interest costs of around $115 a week by the end of 2012. That may encourage many to pay off debts even faster than they already are.

bernard.hickey@interest.co.nz