The Reserve Bank has raised the official cash rate by 25 basis points to 0.5 per cent, ending an 18-month spell at the record-low rate of 0.25 per cent.
ANZ, the country’s biggest bank, announced within minutes that it was increasing the interest rates on its floating and ‘flexi’ home loans by 0.15 percentage points, taking its floating rate to 4.59 per cent.
Kiwibank followed, announcing its floating and offset mortgage rates would rise by 0.25 percentage points to 4 per cent, and its revolving rate by the same amount to 4.05 per cent.
The rise in the official cash rate is the first since 2014 when the OCR hit a post-GFC peak of 3.5 per cent.
The rate hike had been universally expected by bank economists, who expect it to be the first of a few as the central bank seeks to keep a check on inflation.
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The Reserve Bank said the current Covid-related restrictions had not “materially changed the medium-term outlook for inflation and employment” since it delayed an expected interest rate rise in August, tipping that inflation would temporarily rise above 4 per cent.
“Capacity pressures remain evident in the economy, particularly in the labour market,” the central bank said.
“A broad range of economic indicators highlight that the New Zealand economy has been performing strongly in aggregate.”
The bank released research in August that suggested it normally took about six months for OCR increases to fully feed through into mortgage rates.
Further explaining its rate rise, the Reserve Bank said it expected economic activity would recover quickly “as alert level restrictions ease”.
“Recent economic indicators support this picture,” it said.
But the bank said its monetary policy committee was aware that the latest Covid restrictions had badly affected some businesses in Auckland and a range of service industries more broadly.
“There will be longer-term implications for economic activity both domestically and internationally from the pandemic,” it said.
What does the official cash rate mean?
The Reserve Bank appeared to leave a large amount of wriggle room over the pace of further rate rises, saying “a further removal of monetary policy stimulus is expected over time, with future moves contingent on the medium-term outlook for inflation and employment”.
ANZ’s director of personal banking, Ben Kelleher, said its own mortgage rate rise balanced its commitment to “supporting people with their home-ownership aspirations” with the increase in the OCR and the bank’s wholesale funding costs.
The rate rises will take effect from Tuesday for new loans and from October 26 for existing borrowers.
ANZ will also increase interest rates on a number of savings accounts, but only by a lesser amount – either 0.05 or 0.1 percentage points.
Asked to comment on why savings rates were going up by a smaller amount than mortgage rates, spokeswoman Kristy Martin said it had increased “key term deposit rates” by 25 basis points last week.
Kiwibank’s mortgage rate rises will apply from Monday for new borrowers and two weeks later for existing loans, but it had better news for savers.
It is increasing savings rates by between 0.15 and 0.25 percentage points, and interest on term deposits by between 5 and 45 percentage points.
Tim Kearins, owner of estate agent Century 21 New Zealand, forecast home buyers would not be put off by the rise in the OCR.
“It will take a lot more than a tweak of the OCR to put off those desperate to get into the housing market,” he said.
That was particularly the case given 165,000 migrants were now eligible for fast-tracked resident visas, Kearins said.
“As long as the option to secure a five-year interest rate at under 4 or 5 per cent remains, this latest Reserve Bank hike will not deter Kiwis from purchasing property.”
Kiwibank chief economist Jarrod Kerr expected Wednesday’s OCR rise would be the first in a series that would take the OCR to 1.5 per cent by the middle of next year.
“We expect a considered pause around 1.5 per cent. Although the Reserve Bank is signalling a continuation to 2 per cent in 2023,” he said, describing the Reserve Bank’s track as “aggressive”.
ASB chief economist Nick Tuffley said it saw the OCR climbing to 1 per cent in February, and to 1.5 per cent by the end of next year.
The Reserve Bank had made it clear it intended to keep lifting the OCR over time, he said.
Tuffley described the central bank’s review as “more hawk than kotuku (white heron)”, referring to a speech by Reserve Bank assistant governor Christian Hawkesby last month that suggested it could pick its steps carefully.
ANZ sees the OCR reaching 1.5 per cent by August through a “cautious series of hikes”.
The awkward global theme was the risk of lower-than-expected growth and higher-than-expected inflation, ANZ said.
That meant the Reserve Bank was “lifting off into a stormy path”, it said.
“As has been the case for some time, the risks are skewed towards something coming along to derail the Reserve Bank’s hiking cycle before its completion, despite extremely strong inflation pressures,” it said.
National Party shadow treasurer Andrew Bayly said raising the OCR in the middle of a lockdown was “incredibly risky for the economy”.
“The Reserve Bank has seen that the cost of living is rising too quickly, and its hand has been forced,” he said.