Mortgage rates predicted to rise to between 6pc to 7.5pc

The cost of a mortgage is set to rise. Photo / 123 RF

Mortgage rates will likely lift to between 6 per cent and 7.5 per cent over the coming year worsening the cost of living crisis, Kiwibank's economists say.

The Reserve Bank has gone on the offensive against inflation, hiking the official cash rate (OCR) today by 50 basis points to 2 per cent.

The Monetary Policy Statement pointed to much higher rates ahead, saying that it sees the cash rate rising to at least 3.25 per cent this year and it was "resolute in its commitment to ensure consumer price inflation returns to within the 1 to 3 per cent target range."

Mortgage rates are currently between 4.4 per cent to 6.9 per cent with more than 60 per cent of the debt either floating or expected to roll off a fixed term this year.

Kiwibank economists said the impact of the RBNZ's tightening was already being felt now and would continue to weigh on household budgets in the year ahead.

"The RBNZ's actions will only worsen the cost-of-living crisis faced by indebted households."

They expect the cash rate to continue rising to 3 per cent by November but believe it will stop around there because of its impact on households.

"...the impact of every move to date, and from here, is causing a material impact on the housing market and household consumption.

"Cooling the housing market and taming consumption is the desired impact of rate hikes."

Kiwibank forecasts house prices to fall by around 10 per cent by the end of the year and predicts consumer spending will also fall.

"Consumption growth will wane as households face the negative wealth effect of falling house prices and a continued cost-of-living crisis."

They say recession risk is the main reason they expect the RBNZ to pause at 3 per cent.

But the higher cash rate will be good news for savers who have suffered from extremely low deposit rates in recent years.

This morning BNZ lifted its term deposit rates. Savers can now lock in 3 per cent for one year, 3.3 per cent over 18 months, 3.8 per cent over three years and 3.85 per cent over four years.