Mortgage holders warned to ‘brace for impact’ after Reserve Bank’s OCR rise

“Brace for impact” – this is the message ANZ economists say mortgage holders should take from the Reserve Bank’s (RBNZ) latest Monetary Policy Statement.

The RBNZ on Wednesday lifted the official cash rate (OCR) by 75 basis points, from 3.5 to 4.25 per cent.

While this jump was widely expected, its hawkish forecasts were what took observers by surprise.

The RBNZ projected the OCR peaking at 5.5 per cent by mid-next year. Three months ago, it forecast a peak of only 4.1 per cent.

It recognised that such aggressive interest rate hikes would likely cause a recession in 2023 and see basically no growth through 2024.

The RBNZ also foresaw job losses escalating, possibly to the point "labour market conditions fall below their maximum sustainable level for a time".

ANZ chief economist Sharon Zollner noted there was not much in the statement for the doves to hang on to.

She said ANZ was still working through exactly how the statement would translate into mortgage and term deposit rates.

Jim Reardon – Westpac's former treasurer, turned consultant – said he could see two-year fixed mortgage rates hitting 8 per cent. They're currently sitting between 6 and 7 per cent.

He questioned whether the RBNZ hoped its hawkish position would prompt banks to price in substantive mortgage rate hikes. This way banks would effectively do some of the work cooling economic demand for the RBNZ.

The RBNZ warned, in its statement, the "normalisation" of banks' funding, as central banks remove excess liquidity from the financial system, "could result in sustained upward pressure on retail lending rates".

The RBNZ explained: "Retail interest rates continue to increase in response to increases in wholesale rates. Mortgage rates have risen across a variety of terms, with larger increases in the popular one and two-year fixed rates, leading to a flattening of the mortgage curve.

Reserve Bank of New Zealand Governor Adrian Orr leaving after the Monetary Policy Statement press conference. Photo / Mark Mitchell

"Term deposit rates have also continued to increase, but remain low relative to comparable wholesale rates.

"This is playing a role in limiting the extent to which higher wholesale rates feed through to higher mortgage rates.

"We expect that higher deposit rates over the medium term will provide upward pressure to mortgage rates, independent of any changes to the OCR outlook."

ANZ senior strategist David Croy noted there are a number of other moving parts that affect banks' funding and therefore mortgage and term deposit rates, including demand for credit and the degree of competition in the market.

The RBNZ also recognised that it will in December stop creating money and lending it to banks at a relatively low cost (the OCR), as its Funding for Lending Programme comes to an end.

Banks have borrowed nearly $19 billion through the programme since it was initiated two years ago to help keep interest rates low.

While this source of bank funding will dry up, a higher OCR means banks will receive more interest from the RBNZ for the reserves they hold at the central bank.

As at October, banks had $49b of reserves at the RBNZ – seven times more than pre-pandemic, when the RBNZ pumped a lot of liquidity into the economy.