The difference is to be expected and reflects the fact it takes a year or two for changes the RBNZ makes to monetary policy to flow through the economy.
When the official cash rate (OCR) was rock bottom at 0.25 per cent in October 2021, the average rate on the stock of fixed mortgage lending was 2.73 per cent.
By October 2022, the OCR had risen by 325 basis points (to 3.50 per cent), but the average rate on the stock of lending had only gone up by 116 basis points.
The RBNZ recognised this lag effect in its November monetary policy statement, when its Monetary Policy Committee considered hiking the OCR by a whopper 100 basis points.
“On the balance of risks, the Committee agreed that a 75 basis point increase was appropriate at this meeting,” it said.
“Members highlighted that the cumulative tightening of monetary conditions delivered to date continues to pass through to the economy via the lagged transmission to effective retail interest rates.”
The Reserve Bank of Australia, when it on December 6 hiked its cash rate by only 25 points, likewise acknowledged, “The board recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments.
“Household spending is expected to slow over the period ahead although the timing and extent of this slowdown is uncertain.”
One of the many reasons there’s division among economists over how much the RBNZ needs to hike the OCR is that the results of policymaking can’t be seen straight away.
Commenting on the fact the Reserve Bank of Australia isn’t lifting rates as aggressively as the RBNZ, ASB senior economist Mark Smith pointed out that Australians tend to take out floating mortgages more than New Zealanders do.
So, the effects of interest rate changes are felt more acutely, more quickly, there.
In October, only 11 per cent of New Zealand’s $342b of mortgage debt held by banks was floating.
Meanwhile just over half of the stock of fixed mortgage lending, worth $306b, was due for refixing within the next year.
Smith expected the average rate on all mortgage lending (fixed and floating) to rise from 4.07 per cent in October, to 4.50 per cent by the end of the year, and 6.75 per cent by mid-2024.
In other words, the pinch will soon be felt by borrowers who haven’t already felt it.
Smith recognised different people would have different experiences with higher rates.
For example, a recent first-home buyer with a $600,000 mortgage would see their weekly repayments rise by $374 to $921 if their mortgage rate jumped from 2.5 to 7 per cent.
Meanwhile, someone who’s lived in their home for some time and only had a $150,000 mortgage would see their repayments rise by $93 a week to $230.
As for those with savings, higher rates are welcome news.
In October, the average rate on the country’s stock of term deposits was 2.99 per cent – up from 1.11 per cent a year earlier.
Again, this was below the advertised rates at the time, which were between 3.63 and 4.62 per cent. Similarly to borrowers, savers need to wait for their term deposits to mature before reinvesting at higher rates.
Higher interest rates are also prompting those with money in their transaction accounts to put some savings in term deposit.
Coming full circle, Smith pointed out that when the RBNZ finally decides to start lowering the OCR to a more neutral level (possibly in mid-2024, if its projections are correct), the relief will take time to take effect.
