It happened. As expected, the Reserve Bank of NZ has announced a whopping 0.75% increase to the official cash rate, bringing it to 4.25%.
I had been optimistically hanging out for a 0.50% rise on the basis that the RBNZ would surely see the harm coming our way. In their accompanying statement it's clear that they can see the damage coming - and did it anyway - with an acknowledgement that this move will tip New Zealand into recession next year.
The RBNZ's forecast is now for the OCR to peak at 5.50% by the middle of next year (up from their 4.00% view in the last August update.) In addition to that, the OCR is not forecast to start decreasing until middle of 2024 so almost two years away, albeit market rates will move ahead of the RBNZ, up and down.
This is a shift upward in their view, which will push short term fixed rates up
The market had anticipated a 5.00% peak, so this is higher. One-year fixed mortgage rates will likely increase by 0.50% from 5.99% to around 6.49% off the back of this, and two-year rates are likely to go up about 0.30%. Longer term fixed rates should largely stay unchanged making in some cases longer-term rates cheaper than short-term rates.
If you have held off locking your mortgage in, lock in now before banks move their rates up in the next few days.
But be careful of fixing into longer-term fixed rates simply because they are cheaper.
When rates do eventually fall, these loans will potentially have large break costs. This is not something we’ve seen in this market since the GFC (global financial crisis), but many borrowers who have been around for a while will have experienced this. Fixing for longer is ok, but only if you aren’t planning on breaking by selling the property or wanting to get to lower rates when they do eventually fall.
How high are mortgage rates expected to go now?
In the RBNZ’s view, the new OCR forecast will push up where rates will peak to between 6.50%-7.00%. There is still a lot of uncertainty going into 2023.
My view remains unchanged that the economy will slow quickly as discretionary spending freezes at the same time as consumers experience a $300 billion fall in their house values. We also have a very slow housing market making it difficult to sell even when people need to, and there's a likelihood of higher unemployment.
We can see this starting to play out already at the coal face, so it’s only a matter of time.
If you are a small business owner, I have huge empathy for the challenge ahead managing yourself through a recession at the same time as handling lower demand, and higher borrowing costs.
Remember, this is only a forecast and we are still near peak rates
The Reserve Bank is forecasting the economy to slow down next year. Depending on how that goes over the next six months will determine how far out we are from seeing a reprieve on the rate front.
My view hasn’t changed that we will see a change in outlook on rates towards the end of next year. That is sooner than the RBNZ's own view that rates won't start falling until mid 2024. Watch this space.