No quick fix for borrowers suffering from a high OCR, he says
In an unsurprising move, the Reserve Bank kept the OCR steady at 5.5% on Wednesday, but some economists have taken the tone of the monetary policy statement as hawkish.
The central bank has slightly pushed out its forecast track for the OCR, indicating that the cash rate would need to stay higher for longer in the face of core inflation pressures and economic uncertainty.
Aaron Cooke, an advisor with Loan Market, told Morning Report that would spell bad news for borrowers who needed to re-fix their mortgages this year, with most two-year fixed mortgage terms currently at around the 7% mark.
“To put it into perspective, if you had a $685,000 mortgage back in 2021 and you had a fixed rate of 3%, and you’re coming off this year at a 7% rate, your payments are going from $2,900 a month to $4,500 a month — so, a very painful change,” Cooke said.
Despite some five-year fixed mortgage rates now available for as low as 5.99%, people would have to think twice about locking themselves into longer terms, he said.
“If we look back to the lead-up to the GFC... there were quite a few people who did lock in what they believed were cheaper rates at the time — for four or five years — and then when rates did decline, they were basically left there, sitting on those higher rates,” Cooke said.
He said it could be tough to cancel mortgage deals and take up a cheaper rate if interest rates drop.
“Effectively, you’re then facing break fees, and you’re going to be up for a big cost and likely not going to win by doing that,” Cooke said.
And while some borrowers could still negotiate better mortgage agreements with their lenders, because banks, too, are “facing higher funding costs as well,” there could be “some discounting, but it’s not massive,” he said.
Jarrod Kerr, Kiwibank’s chief economist, said the bank hoped the current two-year fixed mortgage rates of around 7% would be the peak for mortgage holders.
“We certainly think so, but the risk is that the central bank comes in again — we hope that that does not happen; we hope that things do turn south in a way in which the next move we think is going to be a rate cut,” Kerr told Morning Report.
He said that although the data suggested the central bank had done enough to combat inflation, its hawkish policy statement showed it still had some concerns.
“They’re worried that inflation doesn’t get back down to 2% fast enough, so they gave us a bit of a warning shot yesterday that if prices hold up for longer, they may have to hike one more time,” Kerr said.
The Kiwibank economist believed New Zealand would see economic growth contract again in the second part of 2023 but said the bank’s forecasts had inflation returning to the target band of 1% to 3% “early next year.”
“I think the Reserve Bank has done enough,” Kerr said. “What we’re seeing in the data suggests that they are getting on top of the inflation beast and that things will play ball over the next year.”
He agreed with RBNZ's assessment that immigration did not seem to be an inflationary factor in the current economy.
“These migrants are coming here, and they’re picking up the jobs, they're filling the vacancies that've been vacant for a very long time,” Kerr said. “What that's doing is putting a bit of downward pressure on wages which is exactly what you want to see; that we're increasing the supply of workers at a time when demand has been quite high.”
Domestically generated inflation continued to be a challenge though, Kerr said.
“We’re sort of rotating from spending a lot of money on goods to spending more money on services, and there's still a lot of inflation coming out of construction and housing-related prices as well,” he told Morning Report.
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