OCR hike unlikely to trigger immediate fixed mortgage rate rises or clobber growth – economists

The Reserve Bank’s decision to lift the Official Cash Rate (OCR) to 2.5% on Wednesday is unlikely to trigger immediate fixed mortgage rate rises, according to economists.

The Reserve Bank delivered a decision that aligned with what traders in financial markets had expected.

It didn’t give them any reason to dramatically change their pricing looking ahead.

While floating rates, which move in lock-step with the OCR, will shift higher, other retail interest rates aren’t expected to move too much on the back of the rate decision.

“For those concerned that today’s rate increase will push up their borrowing rates, relax,” BNZ’s head of research Stephen Toplis said on Wednesday.

“For the time being, the two-year swap rate, which is a significant determinant of two-year mortgage rates, has barely shifted, as today’s move was already largely priced in by financial markets.

“Given this, suggestions that a hike today would clobber growth are misplaced.”

Similarly, ANZ chief economist Sharon Zollner believed that rather than the OCR hike materially pushing lending and savings rates up, it would “put a bit of a floor under short-end rates”.

She made the point the Reserve Bank would have shocked the market if it didn’t follow through with the rate hike it had pencilled in.

Had it not lifted the OCR, it could also have looked like “the boy who cried wolf” over the risk of rising inflation.

This would have led to retail interest rates falling – a scenario the Reserve Bank wouldn’t have wanted, as it is trying to remove stimulus from the economy by getting the OCR back to a more neutral level at about 3%.

The Reserve Bank noted financial conditions had eased since it last reviewed the OCR in late May.

Tensions had eased in the Middle East, reducing oil prices and soothing concerns over rising inflation. The New Zealand dollar had also continued to weaken against the US dollar.

Lower wholesale interest rates led to banks cutting some of their longer-term interest rates.

While shorter-term rates continued to rise, and retail rates were generally well up from their November trough (thanks to tight financial conditions earlier in the year), the Reserve Bank wanted to lean against financial conditions becoming too easy.

“Increasing the OCR at this meeting is intended, in part, to avoid an unwarranted further easing in financial conditions,” it said.

Zollner noted this language was pretty soft. The Reserve Bank wasn’t trying to push retail interest rates materially higher. It was in part ensuring they didn’t fall.

In this sense, she agreed with Toplis, that concerns over the OCR hike decimating an already fragile economy were misplaced.

“They’re not trying to kill off the recovery,” she said.

Zollner made the point OCR changes take about 18 months to take effect. Borrowers will only experience higher interest rates when they come to refix their loans, for example.

While the Reserve Bank was talking tough on inflation in May, some six months after it made its final OCR cut in this cycle, the average interest paid on the country’s stock of mortgages was still falling to 4.83%.

Zollner said it was important for central banks to cast ahead, while trying to avoid moving too soon or too late.

“We are optimistic that the economy will get back on track before long,” she said.

“While our OCR forecast of three hikes in quick succession is unchanged since the peak of the oil price shock, the underlying story is now a much more cheerful one.

“We think the RBNZ will continue to hike the OCR because the economy doesn’t need stimulatory monetary policy any longer. That’s a lot more palatable than the previous scenario, of the RBNZ having to hike despite a weak economy because of an external cost shock that demands extra short-term pain to achieve the long-term gain of low and stable inflation.”

Kiwibank chief economist Jarrod Kerr, who had called for the Reserve Bank to hold off hiking the OCR, was disappointed by Wednesday’s decision.

He had hoped the decline in oil prices would convince the Reserve Bank the inflation spike would be temporary.

He also noted the labour and housing markets were weak and economic recovery uneven.

“The so-called ‘wealth effect’ has been missing for years now,” Kerr said.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.