Will higher-than-expected inflation push mortgage rates up?
Possibly, but not necessarily, is the view among experts the Herald spoke to.
Prices rose by more than they were expected to by the Reserve Bank of New Zealand (RBNZ) and most bank economists, between the June 2021 and June 2022 quarters.
The consumer price index (CPI) rose 7.3 per year-on-year, due to both imported and domestic factors. The RBNZ in May forecast a 7 per cent rise.
Traders in financial markets responded to the CPI data release on Monday by betting on higher wholesale interest rates.
Their rationale was that if there's more inflation, the RBNZ might need to raise the Official Cash Rate (OCR) more aggressively than previously expected. This could feed through to higher mortgage rates.
Indeed, traders see a 50 per cent chance of the RBNZ hiking the OCR by a whopping 75 points when it next reviews monetary policy on August 17. They see it ultimately peaking just above 4 per cent, where the RBNZ sees the OCR capping out.
Economists on the other hand, still expect the RBNZ to lift the rate by 50 points from 2.5 per cent to 3 per cent next month, but generally aren't writing off the possibility of a 75-point hike.
The majority see the OCR peaking at 3.5 per cent, but ANZ economists on Monday revised up their forecast peak to 4 per cent by November.
The question then is, will this push mortgage rates up?
Yes, according to ANZ chief economist Sharon Zollner, who believes the rises will be more acute across shorter-term than long-term rates.
She notes that while New Zealand is importing a lot of inflation via high oil prices, for example, annual domestically driven "non-tradeable" inflation came in very high at 6.3 per cent in the June quarter.
This was above the 5.7 per cent forecast by the RBNZ, so will require the RBNZ to do more to dampen demand in the economy.
With the likes of the Federal Reserve also leaning against stronger-than-expected inflation in the United States, Zollner believes there is a bit more pain to come for mortgage holders.
Economists who are of the view the RBNZ won't get the OCR above 3.5 per cent, because the aggressive hikes it's making will sufficiently cool the economy, don't see fixed mortgage rates going much higher. Changes in floating rates are of course more closely linked to changes in the OCR.
Independent economist Tony Alexander believes two-year and longer-term fixed mortgage rates are at, or close to, their peaks. However, he sees the one-year fixed rate going higher.
He sees rates staying at these levels for the next six to nine months.
Alexander's view is that higher rates are largely already priced in, and the June quarter CPI reading is proportionately only a little above what was forecast.
He believes the market response is insignificant in the context of recent gyrations in the wholesale interest rate outlook, which are largely driven by offshore factors.
Indeed, it was only a couple of weeks ago that jitters over slow economic growth prompted traders to bet on the RBNZ not hiking the OCR as aggressively as it suggested it would. This saw banks cut some mortgage rates.
While the interest rate outlook has now changed, it isn't as gloomy for mortgage holders as it was before that dip occurred.
Kiwibank chief economist Jarrod Kerr, and BNZ senior interest rate strategist Nick Smyth, likewise see the market response to the CPI data as minor in the scheme of recent volatility.
Kerr believes fixed mortgage rates are at their peaks now, and are likely to remain at these levels for the foreseeable future – i.e. the next six months.
He sees slowing economic growth dampening inflation, without the need for OCR hikes above what has been priced in.
Kerr notes global growth is being slashed and commodity prices are softening. Business and consumer confidence are rock-bottom, with firms' signalling little intention to invest.
Consumer spending is only holding up in nominal terms due to inflation, as people are spending the same amount to buy less.
As for Smyth, he notes markets are already cognisant of inflation risks, hence they're expecting the OCR to peak above 4 per cent.
Accordingly, he believes mortgage rates are close to their peak.
Smyth also makes the point that in addition to wholesale interest rates, banks' access to funding influences mortgage rates.
He noted that looking ahead, financial conditions are tightening, as central banks around the world remove liquidity from the financial system.
Or in Zollner's words, they're trading money printers for vacuum cleaners.
The RBNZ is selling the government bonds it bought as a part of its $54 billion Large-Scale Asset Purchase programme.
It will, in December, also stop creating money and lending to banks at the OCR via its Funding for Lending Programme.
When this happens, Smyth recognises banks will have to work harder to secure funding. They may have to lift their very low term deposit rates to attract deposits. This will in turn also put upward pressure on mortgage rates.
Looking ahead, all eyes are on June quarter labour market data due out on August 3 – ahead of the RBNZ releasing its Monetary Policy Statement on August 17.
If the labour market turns out to be tighter than it expected, the RBNZ might have the impetus to hike the OCR more quickly, or to a higher endpoint, than planned.
Nonetheless, mortgage rates are also affected by global factors, which there is an enormous amount of uncertainty around.
To this extent, the economists the Herald spoke to shared their views with humility; Zollner characterising the exercise of predicting mortgage rates as a bit of a "mug's game".