Governor Adrian Orr and his colleagues will be encouraged by Tuesday’s inflation figures, which were the lowest in two years.
Stubborn domestic pricing pressures will keep it on alert, but the Reserve Bank is in a holding pattern for now.
It’s hard to see any OCR change coming at the November meeting, which is the last one for the year.
Beyond that, the next monetary policy decision comes in February. Hopefully, in four months’ time, inflation will have slipped a little further and the labour market will eased slightly too.
The new government will have also taken shape and we’ll have a clearer picture of how policy changes might impact the outlook.
Some economists have noted that National Party tax relief proposals could put upward pressure on inflation, thereby pushing interest rates even higher.
That’s possible, but if NZ First is in the mix, I’m not sure it will support tax cuts.
Another reason I see the Reserve Bank sitting on its hands is that it’s still getting very good bang for buck out of its previous OCR increases.
Most of us opt for fixed rates, which means we don’t feel the effect of higher rates under our loans come up for renewal.
That’s why they say monetary policy operates with a lag, because it takes time for changes in interest rates to work their way through the economy.
The faster the move in interest rates, the bigger impact when reality catches up.
Right now, fixed mortgage rates are around 7 per cent, give or take.
However, the average fixed rate borrowers are paying is only 5.2 per cent, because many of us are still enjoying rates that we signed up for some time back.
As those roll off, we’ll move on to the higher current rates and keep getting hit in the pocket even though the Reserve Bank has been on the sidelines since May.
What’s a borrower to do if their mortgage is coming up for renewal?
Floating rates are the highest at around 8.5 per cent, but unless you want maximum flexibility there’s little incentive to pay this premium.
Looking across the fixed rate options, the shorter timeframes are most expensive with six or 12-month terms at just above 7 per cent.
As you go out to three or five years, fixed rates come down into the mid-sixes. That’s where you’d head to keep your monthly bill as low as possible, but there’s a risk with this approach.
If inflation continues to cool, the economy slows (as people roll on to current rates) and the OCR turns out to be at (or close to) its peak, the tipping point could be upon us next year.
Those who opt for a lengthier term will save some money in the immediate future, but they might find themselves stuck on higher rates against a backdrop of declining interest rates.
If you believe that’s how things could play out, it might be preferable to select a shorter-term rate and keep your options open.
You’ll pay slightly more right now, but you’ll be able to take advantage of lower rates if that’s where things are at when it’s time to renew your loan the next time around.
Sometimes the need for certainty around your household budget trumps all of this, so if long-term repayment clarity will help you sleep at night, maybe there’s your answer.
If in doubt, get some advice.
Just remember things can change quickly in financial markets, so what you’re hearing today from banks, policymakers and economists won’t necessarily be as relevant by Labour Day of 2024.
Mark Lister is investment director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.
