Last Wednesday’s Official Cash Rate Announcement was very much as markets predicted. The official cash rate (OCR) increased by another 0.50%, taking it to 4.75%. At the same time, the Reserve Bank signalled it was expecting to increase the rate to a peak of 5.50% later this year. This is in line with previously forecast peaks, although it does not now expect this peak to be reached until late 2023. This OCR increase will quickly flow through to floating and short-term fixed rates.

Longer-term wholesale rates have largely already “baked in” this path of increases, so we are not expecting this most recent OCR change to materially impact longer term fixed rates. Longer term fixed rates have though had a relatively volatile February. These rates are impacted more by global wholesale markets. After softening in January and early February, these rates have increased again in recent weeks. Global interest rate markets seem to have moved from thinking that central banks, and particularly the US Fed, are done with their rising interest rate cycles, to thinking that maybe they need to do more to slow inflation by pushing interest rates higher and holding them there longer. Consequently, longer term fixed rates have increased somewhat over February.

The real impact of these rises for New Zealand households and businesses will soon be felt as about 50% of existing mortgages, and a portion of commercial lending are due to roll off historically, very low rates and onto current market pricing. The cash impact for heavily indebted borrowers can be very significant and will likely flow through to dampen consumer spending.

Antidotally, we are seeing some target induced competitive tension between funders, particularly in the home loan market, where lower than carded pricing is being offered to win transactions as banks fight for volume in a slowing market.