Borrowers are bracing for a tough 2023, as rising interest costs are expected to keep eating into their disposable incomes.
But the pain of a rising official cash rate (OCR) is taking its time to be felt across the economy.
The latest Reserve Bank data shows the average interest rate banks received on all their mortgage lending (fixed and floating) was 4.19 per cent in November.
This was the same as the average in November 2019, when the Reserve Bank was trying to fuel inflation by cutting the OCR.
A key difference between the two periods was that borrowers had more debt in November 2022. At $338 billion, the value of the country’s mortgage debt was 24 per cent higher than in November 2019.
So, the amount of money effectively being sucked out of the economy via mortgage interest was $3b more in November 2022 than three years prior.
Another difference was that in 2019, monetary conditions were being loosened and people expected interest rates to remain lower for longer.
The average two-year fixed mortgage rate sold at the time was around 3.5 per cent, compared to 6.1 per cent in November 2022, according to interest.co.nz.
Globalisation and technological advancements were expected to constrain inflation, and thus interest rates, in the medium- to long-term.
However, Covid-19 and the war in Ukraine challenged this theory.
The dominant school of thought now is that disrupted trade and supply chains and higher energy costs will keep interest rates more elevated than they were in the recent past.
So even though the average mortgage holder paid the same interest rate in November 2022 as they did in November 2019, the outlook is different.
Looking at the other side of the ledger, the average interest rate banks paid for term deposits was 3.24 per cent in November 2022.
This was a bit above the 2.86 per cent paid in November 2019 and the highest rate since April 2019.
Again, because it takes time for OCR changes to filter through to all borrowers and savers, the 3.24 per cent paid in November 2022 was still well below the 4.7 per cent those taking out new one-year term deposits were being offered at the time.
All eyes are now on when the Reserve Bank and its counterparts around the world will be satisfied their rate hikes are causing enough belt-tightening to curb economic demand and dampen very high levels of inflation.
The Reserve Bank is widely expected to lift the OCR by another 75 basis points to 5 per cent at its next review on February 22.
Two upcoming data releases it will pay close attention to are the December quarter consumer price index (CPI) figures due out on January 25, and the New Zealand Institute of Economic Research’s Quarterly Survey of Business Opinion published on Tuesday morning.
The Reserve Bank will also be mindful inflation is easing in other parts of the world.
Annual inflation in the United States declined for the sixth consecutive month in December to 6.5 per cent. Goods inflation cooled, but a tight labour market kept services inflation elevated.
Recognising this, and early signs the “shock value” of the Reserve Bank in November openly saying it is orchestrating a recession, ANZ’s hawkish economists have softened their stance a little.
“We see downside risks to our OCR call (a peak of 5.75 per cent), but upcoming Q4 CPI data will be key,” they said.
Meanwhile, BNZ economists said, “We are seeing more signs that tightness in the labour market may have peaked. And it looks like the Reserve Bank could be surprised on the downside for inflation.
“If so, this would be the first time in a long time following an extended period of surprises in the other direction. If these developments are corroborated by upcoming data, then the balance of risk on interest rate projections will also move to the downside.”