The OCR is 3.5 per cent and economists were already predicting a rise of 75 basis points at the next Monetary Policy Committee meeting in two weeks. That will likely be shored up further by the strong wage growth.
Banks have been lifting mortgage rates in recent weeks and more could come after the strong wage data.
The Reserve Bank’s Financial Stability Report shows some households are hurting and that will get worse as borrowers roll off lower fixed-term rates onto current rates which are sitting around 6 per cent.
Around 2 per cent of mortgage debt is in negative equity where the borrowers owe more than the value of their house. House prices have fallen 11 per cent from last year’s November peak and 15 per cent in Auckland.
If house prices were to fall another 10 per cent, that would put 7 per cent in negative equity. A larger 30 per cent drop would put 38 per cent in negative equity.
Being in negative equity isn’t in itself a problem unless you are forced to sell the property.
That’s where staying employed is key.
The report pointed out that rising unemployment is the highest risk to financial stability as borrowers who lose their job will likely struggle to pay for high levels of debt.
But rising unemployment is exactly the side effect expected and somewhat desired from increasing the cash rate.
The level of disposable income mortgage borrowers use to pay for their debt is expected to rise from 9 per cent to 20 per cent, reducing how much consumers have to spend.
If they are spending less then businesses have less demand for their products and services and won’t need to hire as many people and may begin to let people go.
The key to it all will be not going too far.
The Reserve Bank stress-tested the banks and found they could cope with an unemployment rate of 9 per cent - substantially higher than the current 3.3 per cent.
But at a household level, that would be painful.
Most at risk are those who borrowed in late 2020 and the first half of 2021 when mortgage rates hit all-time lows and banks were carrying out affordability testing at 6 per cent - which mortgage rates have already hit.
At an interest rate of 7 per cent, the RBNZ estimates around 46 per cent of 2021′s mortgage borrowers would need to spend at least half of their after-tax income on interest payments.
Holding onto employment will be key for those borrowers. Bringing down inflation while ensuring unemployment doesn’t rise too far will be a tough tightrope to walk.
