Action already taken constrains spending, inflation
Mortgage holders can breathe a sigh of relief after the Reserve Bank of New Zealand decided to leave the official cash rate on hold at 5.50% when the bank’s monetary policy committee met today.
In its July 12 decision, the RBNZ committee said the level of interest rates was constraining spending and inflation pressure as anticipated and required.
“The Committee agreed that the OCR will need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1% to 3% annual target range, while supporting maximum sustainable employment,” it said.
The MPC said global economic growth remained weak and inflation pressures were easing, following a period of significant monetary policy tightening by central banks internationally.
“In New Zealand, inflation is expected to continue to decline from its peak, and with it measures of inflation expectations,” the RBNZ said. “Core inflation is expected to decline as capacity constraints ease. While employment is above its maximum sustainable level, there are signs of labour market pressures dissipating and vacancies declining.”
The RBNZ also said consumer spending growth had eased and residential construction activity had declined, while house prices had returned to more sustainable levels. “More generally, businesses are reporting slower demand for their goods and services, and weak investment intentions.”
It was confident that “with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range of 1 to 3% per annum, while supporting maximum sustainable employment”.
Reacting to the RBNZ’s decision, Nathan Miglani (pictured above), managing director and head of lending at brokerage NZ Mortgages, said RBNZ governor Adrian Orr had previously “made it pretty clear" that the OCR was at a peak and he had no intention of increasing the cash rate any time soon.
“However, the interest rates are directly impacted by wholesale swap rates and both the one-year and two-year rates have gone up in the last two to three weeks,” Miglani said.
Because of this, Miglani said he wouldn’t have been surprised if the RBNZ had decided to increase the cash rate by another 0.25% but the chances of this occurring had been small.
He said about 70% of mortgage advisers had predicted the cash rate would remain on hold because inflation was flattening.
“That’s a clear sign there’s no real need to increase the OCR – we are already technically in a recession anyway,” Miglani said. “GDP has fallen, so retail sales are going to get hit pretty badly over the next six months. With interest rates at an all-time high, people won’t be spending money on big-ticket items.”
Miglani said he was advising his NZ Mortgages clients with home loans up for renewal to lock their interest rate for no more than one year.
“The mortgage interest rates will start to come down in the next six to nine months.”
Miglani said about 60% of his clients were on lower interest rates and 40% of his clients had already rolled off low rates onto much higher rates.
“Over the next six months that 60% will roll onto higher interest rates. The feedback from existing clients was that they had found it (rolling off) a bit hard because some had mortgage payments that had more than doubled.”
Mortgage holders who had bought property at the peak of the market in July 2021 had locked in low interest rates between 2.59% to 2.99% and these fixed terms were ending in coming months.
“We are communicating with these clients – just be prepared because these repayments will go more than double,” Miglani said.
However, he said clients were coping well because employment remained strong and many job sectors had enjoyed pay rises.
“Of course, discretionary spending on family holidays, renovations, buying cars, is on hold.”
