That level of extra spending is most likely to help drive inflation up, meaning interest rates could rise higher, faster in a bid to try to put a brake on rising living costs.
Bruce Patten, mortgage adviser with Loan Market, said that with many economists now tipping the OCR to jump double what was expected, the Budget would likely help raise the cost of living for many rather than ease it.
“They’re giving with one hand and then with the other it’s going to be taken away from anyone with a mortgage,” he said of the Government’s Budget promises.
His warnings come as Kiwis have been straining under fast-rising living costs for the past year and a half.
It’s led interest rates on fixed one-year home loans to jump from record lows close to 2.5 per cent to now being around 6.5 per cent in a short space of time, leading to most homeowners paying tens of thousands of dollars more on their annual mortgage repayments than they did a year or two ago.
Patten said that - with Infometrics’ Olsen and economists from ASB and BNZ now saying there’s a greater chance the Reserve Bank could next week raise the OCR by 50 basis points rather than 25 basis points - more pain is in store for homeowners.
The OCR has an important influence on what interest rates banks offer their home loan customers.
However, there is no reliable way to predict exactly how much banks will raise their own rates in response to an OCR rise.
One study commissioned by the Reserve Bank of NZ in 2021 found that a 1 per cent or 100 basis point rise in the OCR, led two-year fixed mortgages to jump about 0.34 per cent within one month, and then keep increasing over time.
Patten said from his experience if the Reserve Bank raises the OCR by 0.5 per cent next week, it could lead to a 0.25 per cent jump in the interest rates mum and dad homeowners pay to their banks.
For a typical Auckland home loan of about $650,000 that could see one-year fixed interest rates jump from about 6.5 per cent to 6.75 per cent and add about $30 extra in repayments each week or $1560 a year, he said.
For recent Auckland home buyers with mortgages of $1 million, such an increase could roughly add as much as $5000 a year onto their repayments, Patten said.
Olsen said most economists had been tipping the OCR to be raised by 0.25 per cent next week.
Banks had likely already priced that jump in and so may not have bumped home loan interest rates significantly.
But with the Government spending more in its Budget than expected, Olsen believed that had likely upset the apple cart because the Reserve Bank had earlier indicated it hoped the Government would be “prudent” in its spending.
That extra spending - combined with the fact more people have been moving to New Zealand than expected and are likely spending money that is helping push demand and price up - meant the OCR would likely go up higher and stay higher for longer, Olsen said.
In other areas of the economy, Olsen said families with young children would definitely get an advantage from the extension of free early childhood education, however, that benefit would only kick in next March.
Families with ill members would also benefit from getting free prescription medicine.
Cheaper public transport for kids would be offset by the fact the Government’s temporary introduction last year of half-price public transport fares across the country would be ending for everyone else on June 30.
Petrol and motoring costs are also about to rise with the Government due to reintroduce a 25 cents per litre excise charge on petrol and end its road user charge discounts on June 30.
The Budget also did not provide any relief on skyrocketing food prices.
“We know from our analysis that over the last year, the average household is spending about $1000 extra buying food over a year,” Olsen said.
“That’s a pretty uncomfortable level of additional spending they’re having to undertake for the exact same amount of food.”
