Reserve Bank Governor Dr Anna Breman finally talks market down, as ANZ the latest to hike mortgage rates

Reserve Bank Governor Dr Anna Breman says tightening of financial conditions was beyond what the bank intended. Photo / Mark Mitchell

Reserve Bank Governor Dr Anna Breman is finally talking down the market, as high swap rates are seeing some banks lift their longer-term mortgage and term deposit rates.

Breman issued a statement on Monday afternoon which effectively told the market its reaction to the bank’s November 26 Official Cash Rate (OCR) cut and accompanying commentary went too far.

Swap rates spiked in the fortnight following the statement.

This saw Westpac and the Co-operative Bank hike their longer-term mortgage and term deposit rates last week, and ASB and Kiwibank deliver quasi interest rate hikes by removing the mortgage rate discounts they offer.

It also saw ANZ lift a number of its mortgage and term deposit rates on Monday afternoon.

ANZ is hiking its 18-month and two-year mortgage rates by 20 basis points, and its three, four, and five-year rates by 30 basis points. It’s cutting its six-month rate by 10 basis points.

As for term deposit and PIE fund rates, ANZ’s one-year rates are going up by 10 basis points, its 18-month and two-year rates by 20 basis points and its three, four, and five-year rates by 30 basis points.

Breman acknowledged, as she did during a breakfast with media last Wednesday, that “financial market conditions have tightened since the November decision”.

However, she went further by saying this tightening was “beyond what is implied by our central projection for the OCR”.

This statement immediately saw the two-year swap rate fall by 9 basis points from 3.12% to 3.03%.

Before the Reserve Bank cut the OCR by 25 basis points last month, the two-year swap rate was at about 2.60%.

The market saw the commentary around the OCR cut as hawkish.

It was prepared for the bank to keep the possibility of a further OCR cut on the table more firmly than it did. The surprise spurred the market to reprice higher.

To add fuel to the fire, the banks were concerned the Reserve Bank strongly suggesting the OCR was at its trough in this cycle would prompt a flurry of borrowers to fix their mortgages for longer durations.

The worry was that this rush could put further upward pressure on swap rates.

JB Drax Honore chief strategist for Asia Pacific, Sean Keane, voiced this concern to the Herald the day of the OCR cut. Other commentators later joined the party, accusing the Reserve Bank of bungling its communications following its November decision.

Breman was asked about the market activity last Wednesday, but didn’t say anything strong enough to sway the market one way or another.

However, she issued the statement ahead of the publication of three media interviews she is doing before the Reserve Bank next reviews the OCR on February 18.

Her interview with 1News is due to run tonight. The Herald and RNZ will interview her tomorrow.

The Reserve Bank said the idea behind the statement was to “enable equitable access to information”.

While she wasn’t involved in the November review as she hadn’t started her job at the Reserve Bank yet, Breman said the statement contained “a thorough and clearly presented discussion of the Monetary Policy Committee’s assessment of economic conditions and the inflation outlook”.

She said the economic outlook since then had evolved broadly in line with the committee’s expectations.

“We continue to see signs that growth is recovering after having stalled in the middle of this year,” Breman said.

“The labour market is still weak but is expected to recover as demand in the economy strengthens.

“We remain confident that annual headline Consumers Price Index inflation will decline towards the 2% target mid-point by the middle of next year.”

Breman reiterated the forward path for the OCR published in the November statement indicated a slight probability of another rate cut in the near term.

“However, if economic conditions evolve as expected, the OCR is likely to remain at its current level of 2.25% for some time,” she said.

Breman repeated what she said last Wednesday, that she was monitoring wholesale market interest rates and their effect on households and businesses.

“Ahead of our next OCR decision in February, we will continue to assess incoming data, financial conditions, and global developments, and implications for New Zealand’s economic outlook and our medium-term inflation objective,” she said.

Breman also reiterated that monetary policy is not on a pre-set course.

“This is why the MPC meets seven times a year to assess the latest economic conditions and forecasts.”

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.

• Stay ahead with the latest market moves, corporate updates, and economic insights by subscribing to our Business newsletter – your essential weekly round-up of all the business news you need.