![mortgage-ratesrf1.jpg](/sites/default/files/2023-04/mortgage-ratesrf1.jpg)
The Reserve Bank, it seems, is being given a pretty clear message by the banks.
The message is that they (the banks) won’t be dragged by the nose into moving their interest rates simply because the RBNZ might want them to.
A week on now from the RBNZ’s surprise 50 point jump in the Official Cash Rate to 5.25% we've finally seen a reaction from one of the banks - the largest as it happens.
But the moves from the ANZ are pretty selective and to me have an air of being a bit political - let's get this central bank off our backs! The biggest move is in the floating mortgage rate, up 40 basis points, while fixed mortgage rates have risen by up to 20 bps, but only for terms of two years or less. Two year rates are popular and its worth noting that the 14 bps rise to the ANZ 'special', two-year, rate takes it to 6.59%, which is actually 15 bps lower than the ANZ was offering (6.74%) towards the end of January.
Likewise the ANZ has tweaked its deposit rates upwards by up to 25 bps - but again at the shorter end, with nothing over 18 months being touched. ANZ's longer rates (two years and up) are still below where they were in January.
And bear in mind that in January the Official Cash Rate was on 4.25%. Now it is 5.25%. So, 100 bps of tightening from the RBNZ and you've got the country's biggest bank having just raised its two-year fixed mortgage rate to a level that's actually 15 bps lower than it was when the OCR was 100 bps lower.
So, the RBNZ is not exactly getting bang for its buck in terms of reactions from the banks. And that's after a lot of cajoling by the central bank - particularly around deposit rates - after both the February and April OCR reviews.
If the moves by the ANZ - a full week after the last OCR decision - are about as good as it gets in terms of reactions from the banks then will the RBNZ be happy with that?
What we are seeing clearly now is a market setting itself up for high interest rates in the short term (say 18 months), but a sharpish fall off after that.
Will the RBNZ be satisfied that such a market rate structure will put its efforts to get inflation back into the targeted 1% to 3% by the second half of next year on track? More to the point, is there much more that it can do other than keep driving the OCR higher and higher? And would that really be wise?
In fairness, as has been said by others, a prime reason for the effort to blindside the market with the size of the OCR increase last week may well have been to stop wholesale interest rates falling further than they already had – to the point where this could have started to put serious downward pressure on the ‘retail’ rates, IE for mortgages.
But is the RBNZ going to be content with near term retail interest rates remaining high but longer term rates possibly drifting lower - when at this stage we've had inflation running at in and around 7% for over a year?
It's looking to me like the decision to go for the double rate hike last week was, at best, a waste of time. And at worst? Well, we'll find out.
I suppose the key question is going to be just how long the RBNZ wants/needs mortgage rates to stay at current levels for.
And lets face it, the banks probably want mortgage rates to fall. They’ve become accustomed to house buyers flocking to them seeking mortgage money – and that’s not what is happening at the moment. The banks are having to fight for relative crumbs in the mortgage market. Something they are certainly not used to in recent times.
So, the banks are probably looking for reasons to push rates down.
The RBNZ wants to make sure that even if bank mortgage rates don’t rise more, they at least don’t fall from these levels. But I think the RBNZ is fighting gravity.
The RBNZ was in a great position at the start of this hiking cycle because it had just so much ammo in terms of available rate hikes. Remember, the OCR was just 0.25%! In addition, because so many bank customers had gone very ‘short’ with their fixed term mortgages it meant they would be affected by any rises in rates quite quickly. Great starting position for the RBNZ.
But that huge amount of leeway the RBNZ had has now gone. And it now faces the situation of running short of ammo while inflation’s still way too high and not yet showing convincing signs of coming down.
Of course, there’s no upper limit to what the OCR can go to. There’s nothing to say that the RBNZ has to stop its hiking cycle at the 5.5% level it is currently forecasting.
The OCR, in a history that dates back to 1999, has been as high as 8.25% - a level it sat on for about a year in 2007-2008.
In fact, the current situation is starting to form some interesting parallels with the situation in the mid-2000s. At that time the RBNZ was trying to get traction against inflation by hiking the OCR - but the banks were sourcing loads of cheap funds from offshore, which they were then lending to homebuyers on fairly lengthy fixed rates.
Many mortgage holders were therefore simply impervious to the whole series of hikes that saw the OCR moved up, by a no-doubt frustrated RBNZ, from 5% in 2003 to the aforementioned 8.25% in 2007. How high the OCR might have gone if we hadn’t had the small matter of the Global Financial Crisis to bring everything crashing down is something to idly ponder over.
What the experience in the mid-2000s showed though is that moving the OCR is no guarantee that the banks and the house buyers will do ‘as they are told’.
And, looking forward to the situation now, I think you can expect increasing defiance from this point on.
So, from my perspective last week's double OCR move was a mistake.
You see, unless there was some reason to believe that global interest rates might start putting upward pressure on our wholesale rates here again – and surely the opposite is more likely to be the case – then after the initial shock to our markets, the decline in wholesale rates was always likely to resume. What then?
Effectively all that’s happened is that the RBNZ has wasted 25 basis-points worth of ‘ammunition’ at a time when it is running out of room to make more OCR hikes. It’s much more threatening if you brandish a loaded (but not fired) pistol than if you wave one around that’s just had all the ammo discharged.
So, anyway, to go back to the point about there no upper level at which the RBNZ may take the OCR, if it is really hell bent on keeping mortgage rates up. Yes, that’s true. No upper limit.
However, the OCR has been raised some 500 basis points in little more than a year and a half.
For all that mortgage rate rises have all-but paused, the rates are still considerably higher than they were. The popular two-year fixed ‘special’ rates for new mortgages now average around 6.5% versus only about 2.6% two years ago. Huge increase.
So at some point you would hope there would have to be some sort of pause to allow things to settle and just see exactly what it is the 500 basis points worth of OCR hikes have done.
The fact is we’ve seen interest rates tightened by an incredible amount in a very short time. It is unprecedented in New Zealand and I stick to my view that such a fast tightening is in essence an ‘experiment’. We don’t really know what the longer term consequences might be of such a degree of tightening in such a short space of time.
Despite everything that’s currently visible in the economy, including a still hot labour market and consumers apparently still willingly spending money, there has to be some chance that everything will suddenly tip over.
And remember also that these OCR hikes are not hitting the entire population evenly. People with freehold houses and money in the bank are sitting comfortably.
So, I would argue that what we absolutely don’t need is the RBNZ engaging in some sort of game of chicken with the banks; the RBNZ attempting to bend banks to its will.
I suspect the RBNZ just might have to show greater patience over the next few months and allow itself to see if the tremendous amount of hiking it has already done will have a big delayed effect. I still think it will.
If this all means the RBNZ having to tolerate some easing in bank retail rates then maybe it will have to.
When all is said and done, if inflation really does carry on steaming away then a new series of OCR hikes down the track could be deployed. But for the RBNZ to do that it would be better if it keeps some ammo now.
This now does appear the right time to employ the waiting game. After all, we have no idea if the RBNZ has done enough, the right amount, or too much.
75 Comments
Yes the RBNZ have increased by a whopping 500bps, but that's from an insanely low 0.25%. when you look at how much higher the current OCR is to where it should have been in a neutral range, it's not even high at all. At this level of tightening only a small portion are feeling the squeeze and most have their heads in the sand as to what's coming. For tightening to reign in spending in broader terms rates must go higher. We are in a worse position now than during the GFC, this time we (NZ) were the greedy ones taking on cheap debt at low stress rates.
If only people stopped spending... can't see it happening large scale yet though. Most Recent retirees are spending up large and enjoying life, many are bulk spending now as prices are expected to continue rising so better to get in early now. Others have achieved higher paying jobs to allow their spending to stay the same. All the while house sales are down dramatically as everyone waits and saves on principal by not-buying now.
As prices rise people bring forward purchases, as they know it’s going to get more expensive. This leads to increased sales and rising prices. I have definitely done this to an extent. Anything non-perishable is worth stocking up on. Wonder if this is just feeding on itself now into a doom loop.
I still cannot understand why the Reserve Bank didn't require banks to keep their stress tests reasonably high. I thought the whole purpose of the stress tests was be an upper limit of what the interest rates could increase up to, so borrowers wouldn't end up with 'mortgage stress'. That that is now too late. Recent FHBs , who are more likely young, as the main ones paying for this mess.
Again, the RBNZ is screwing up its decision making, repeatedly getting things wrong and not making any changes to the way you make decisions, nor your understanding, means you will keep getting it wrong in the future.
Serious reform of the RBNZ is needed, not just trimming around the edges. From my understanding they don't employ any behavioural economists either, so they are clueless about what there actions are likely to do. Essentially they are an antiquated organisation that has a limited set of tools trying to control an environment they don't understand well.
Check our history. High interest rates stop inflation. It is that simple. Anyone who says different is either lying or does not understand how things work. The banks do understand, and are lying. The others should check out all our other periods of high inflation. As Winston Churchill said," It is difficult to get someone to understand something, if their income depends on their not understanding it."
I aren't denying that. I am saying that there is a delay between inflation reporting (it's somewhere between 4-6 months old, the inflation reports we have) as well as the effect of rate changes have (somewhere between 9-12 months). So we are using out of date data, to make decisions today, when the effects of previous decisions haven't even hit.
We also now import most of our goods that we use, which means we are in a very different environment previously when we manufactured most of our goods - which is what the OCR tool was designed for. The OCR does not influence the decisions of overseas companies in their price setting, least of all OPEC, which is where most of our inflation is coming from.
There have been many comments on this site noting greedy companies increasing their margins claiming inflation. This has been the case for 2 years now and sadly feeds into inflation by increasing domestic inflation when it comes to essentials like food.
Pricing external to NZ is not the culprit, spending in NZ is. We are still moving through the process from the denial phase and if the interest rates keep rising we will enter a panic phase. How hard that landing is will depend on how prepared the majority of the country is financially.
The spending they are targeting is being addresses as people come off low priced fixed loan terms and onto high priced ones, 70% of which will happen by the end of this year. Those going onto higher mortgage rates, will spend less in the economy, but this doesn't happen overnight, again there is a lag.
Perversely, as noted in other comments, we have a more aged population than we previously had with more money put into term deposits. Raising the OCR also causes their term deposits to increase returns, which then means those with large term deposits spend more than they would normally. If we all had $700k sitting in term deposits making $35k per year, we would likely increase our spending as the OCR rises, not what the RBNZ wants. This is what many retirees are doing now, after long periods of limited returns. When we have a young population with debt, this isn't a problem, but when we have an older population with cash in the bank, it is.
Interestingly, got an email today from a company i mentioned around (Jan I think), who had put their prices up 50%. We greatly reduced our usage of their services as a result.
Well, today they've dropped their prices by 10%. Still not enough to entice us back, but it was a luxury service so I wonder how many other people dropped them like we did.
by sit23 | 13th Apr 23, 11:24am 1681341862
Check our history. High interest rates stop inflation. It is that simple. Anyone who says different is either lying or does not understand how things work. The banks do understand, and are lying. The others should check out all our other periods of high inflation. As Winston Churchill said," It is difficult to get someone to understand something, if their income depends on their not understanding it."
How far back in history are you referring to Sit23? Or are you basing this just on the 1970's and 1980's?
Here are some charts over the past 100 years:
UK inflation and interest rates
US inflation vs US interest rates
One (of many) perspectives on this situation is that a number of those recently retired (a big boomer cohort) individually have hundreds of thousands in cash funds and term deposits. They are also receiving superannuation that is increasing at the rate of CPI/wage inflation (6-7%).
For them, central/retail banks raising rates is fantastic as they are now earning tens of thousands in additional income per year from their very low risk passive income streams. For those in that position, they aren’t reducing consumption as they feel more secure now than they did when rates were 0%! (have a number of acquaintances, relatives in this situation - they were tighter with their money when their TDs were earning 1% than they are now at 5-6%). But as they are retired, they are no longer producing, but they are consuming with higher rates paid to their cash holdings (inflationary).
The present pain/pain ahead is for those carrying excessive debt relative to incomes. Ie those in their 20’s-40’s who have loaded up with mortgages (and any other property investor type who loaded up with more debt when rates were low - as opposed to using low rates as an opportunity to reduce debt)
The thing is Yvil, you can’t eat a mountain of capital gain on paper.
As Kenny Rogers would tell you -
you got to know when to hold em
know when to fold em
know when to walk away
Know when to run.
The ones I know are asset rich (and falling) and cash poor. They seem to all be waiting for the high water mark again to cash out and can’t see the flood
If they only own the one house, they are not likely going to benefit much. The ones that will benefit are retirement villages, and I have noticed that they aren't dropping their prices. So people may buy into these places for about the price they sold their existing house for. Where previously people expected to get some spare cash out of the transaction.
Debt to buy income producing and generally appreciating assets is good. But we have to understand that over the lifetime of the investment, there are some downturns. For example, the 45% increase in house values during Covid was never sustainable and it's only normal to have a serious reversal now.
I am one of those people, no debt and piles of cash that was getting no return. Now interest payments are pouring into my bank account, so I'm buying new phone, new laptop, maybe one of those robot vacuum cleaners and lawnmowers .... It feels like winning the lottery LOL
Another way of looking at this is the following. Let us say you have $500,000 in cash funds/term deposits and are mortgage free and receive super.
In 2020 when inflation for consumer items was 2% you would earn $10,000 p.a. in income from those cash assets (less tax...using a 2% term deposit/cash fund return)
In 2023 when inflation for consumer items is 6% (on average), you can now earn $25,000 p.a. in income from those cash assets (e.g. 5% term deposit).
So an increase in $15,000 p.a. to spend on food, fuel, groceries etc. It is meaningful increase - but of course it depends on your spending habbits.
Are you now spending $15,000 a year more on items like rates, food, fuel etc because of the recent increase in inflation compared to 2020? If not, you might find that despite inflation being higher, because of your cash position and the increase in interest rates, you are actually better off.
I'm not sure about anyone else, but if the RBNZ pauses; backtracks or hints at anything similar, those term deposits I have maturing each month from now on won't be rolled-over - they will be spent.
And funnily enough my spending won't be stimulating the local economy but someone elses, because on balanced we are a net imported of whatever it is I will buy. A couple of new replacement cars next month - EV's of a German origin for a start. I quite like the look of the EQS.
Show me a reason to tie up my liquidity from here and I will. Show me the potential for this mess we are fighting our way out of to 'go back to normal' and I'll be spending on day one. If you want me to join in the Inflation Game, fair enough, I will. And so will everyone else with any sense.
Unless you have oodles of cash, don't spend. Our health system is falling apart. You are going to need private medical insurance. $1100/month for my parents (84yrs). If you have set aside a couple of hundred K$ in your retirement planning for health you are about right.
Kiwis have no idea of the mess NZ will be in 20-30 years. You''ll want private education, healthcare and to live in a gated community.
Banks are still sitting on piles of money they obtained at the cheapest rates ever, and they have increasingly fewer takers to lend out to - so it makes no sense for them to keep increasing rates - as that simply reduces the pool of borrowers they could lend to.
Sure the OCR is important if the banks have to borrow money to lend out from RBNZ right now, today, but they don't.
a) they have the super cheap money nest egg that they borrowed during the COVID madness
b) they don't have a massive amount of demand for lending right now
Until one or both of those change, OCR hikes have reduced effectiveness - and given current market dynamics (certainly for residential property which is where banks in NZ make money) - that doesn't seem to be looking to change any time soon.
There's a growing gap between falling house prices and the amount people can borrow in today's market - if rates increase that gap grows and the banks do less business. If house prices fall even faster to meet the lowering borrowing bar, then banks face the prospect of losing money on mortgagee sales and the like.
So, simply put, banks don't want higher rates - they do less business - so the RBNZ can continue to raise the OCR but there's no forcing function at present that requires the banks to pass it on until they run out of COVID cash or they have such demand that they need to run cap in hand to RBNZ for more money to lend.
Banks don't lend out money obtained from the central bank or from any other source, they create new money as credit and bank deposits.
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creati…
https://www.bankofengland.co.uk/working-paper/2018/banks-are-not-interm…
https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/…
Ozzy reserve bank have appologised for their rate increases actions. But what it the chance that the NZ reserve bank will?
- No way.
- Nope
- Nah
- Sorry, can’t do that.
- Not happening.
- Absolutely not.
- Not a chance.
- I’m out.
- Can’t agree to that.
- No thanks.
- No can do.
- Not interested.
https://www.news.com.au/finance/economy/interest-rates/reserve-bank-of-…
They only need to apologise for not hitting their inflation and employment targets ( for so long).
If ocr is the tool needed to sort it then RBNZ please get on with increasing it faster and stop faffing around with little tweaks.
Honestly .. we dont need more patience we need less of it
Comparing NZ with Ozzy is pretty much comparing apple with Orange really. Ozzy didn't have the crazy inflated housing market to start, they had a better tax system, they put capital gains tax on properties used for investment. So, less speculation on the houses. They have productive industries where New Zealand doesn't. If we blindly follow what their reserve bank is doing, we will be screwed.
And yet…”According to the IMF’s World Economic Outlook, Australia is facing the second-highest risk in the developed world – falling just behind Canada – as a result of their notoriously expensive house prices coupled with high household debt and increasing variable mortgage rates.”
There will be more hikes. More pain for some.
And then DTI ratios implemented in a year - 18 months to head off the expected drop in interest rates and restarting of the housing Ponzi.
RBNZ can only do so much with tools it has, the rest is up to politicians - eg means test super, make pension savings tax free, reduce minimum wage but give workers a tax free allowance etc
What happened in the '80s was that a whole lot of people suffered because of high interest rates, and the government helped them get by. Some lost their life savings, some lost a bit, others made fortunes, and because of our social welfare policies, nobody starved through the fault of high interest rates. It is, and will be, the same this time. I bags be in the third group.
The RBNZ just might have to show greater patience over the next few months and allow itself to see if the tremendous amount of hiking it has already done will have a big delayed effect.
Great point and the answer is "hell yes, just see what a mess NZ will be in, by the end of this year"
Why do you keep talking such rubbish? Things will happen. Finance takes it's cycle. Life goes on. NZ will survive, and come out stronger than ever, because of our usual primary producers, and our tourism stuff. You just have to wait a bit for the high interest rates to do their job. Surely you are old enough to have lived through the odd downturn, or at least read about them. There are heaps of opportunities in the near future coming up.
The Reserve Bank needs to show more and better understanding of how its policies are affecting the common man/woman in their day to day lives. Inflation fighting by raising interest rates are not helpful for them, as they have to pay more for everything. The Central Bank while pumping money into the system in the past set the tone for inflation. The earlier action helped only the Banks and the Wealthy. They better do something to relieve the pain for the afflicted.
QE only gives banks additional reserves and which they cannot lend out or spend.
https://www.bankofengland.co.uk/-/media/boe/files/speech/2023/april/qua…
https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/…
Well...their earlier report seemed to claim that their earlier actions hadn't disproportionately benefited the wealthy because everyone's houses and shares went up similarly thanks to their stimulus.
Folk without shares and houses aren't part of society, obviously.
Perhaps once the zombie businesses fail and things starts to look like they are on the way back up, the bank can diversify their lending from being so heavily weighed on the property market, and be willing to take a chance on new businesses. How else do we start to manufacture more and become a country more profitable on production as opposed to passive gain in asset prices?
By having a flat land tax on all land forcing a productive return from it, aka a working profitable business based off of it or on top if it. A tax paid quarterly. Those speculating and or land banking will be upset, but it would stake a massive step to money seeking and supporting productive business vs the lazy speculation on capital appreciation we have now..
https://www.news.com.au/finance/economy/interest-rates/reserve-bank-of-…
"...
Meanwhile, deputy governor Michele Bullock also conceded the RBA’s crucial interest rate messaging was “garbled”.
For most of 2021, the RBA issued the same repeated assurance: “The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.”
Countless Aussies took out mortgages over this period, at a time when house prices, and therefore mortgages, had never been more expensive, with many taking those crucial four words – “2024 at the earliest” – into consideration when making such a momentous life decision...."
Tobe fair anyone basing a life changing decision would have read the context .. being the phrase 'does not expect' ...
It is 100% guarenteed that if there is a significant black swan event or if the board made a mistake there will be an impact on rates almost immediately. If people do not and did not understand or research that then they deserve the outcome.
Those people that did fully understand the risk.. and mitigated .. will be fine. It serves as a reminder of the importance of personal accountability.
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