A major market signal! Mortgage rates see their first big adjustment this year! Rates set to break 3! Monetary policy continues to tighten, with an OCR increase possible!

Strong economic recovery puts rate rises on the horizon

Global financial markets have been on a rollercoaster over the past fortnight. Last Thursday, the three major US share indices fell sharply, before quickly rebounding on encouragement from China’s central bank cutting its reserve requirement ratio. The S&P index reached another record high. This week, investors are focusing on Australian employment figures and New Zealand CPI data, while new interest rate decisions from the Reserve Bank of New Zealand, Bank of Japan and Bank of Canada are also imminent. 

New Zealand figures released last week showed business confidence in this year’s second quarter reached a 4-year high. Meanwhile, the central bank’s interest rate monitoring tool shows that the likelihood of the Reserve Bank of New Zealand starting to raise rates this year has risen above 60%. At its previous monetary policy meeting, the Reserve Bank had already indicated that OCR increases would begin in the second quarter of 2022. In the near term, any firm indication from the Reserve Bank of an earlier rate rise will significantly affect the New Zealand dollar’s direction.

 

One-year and two-year rates see their first major adjustment this year

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ASB’s rate increases announced today show that one-year and two-year fixed mortgage rates are seeing their biggest adjustment this year. The one-year fixed rate is rising from 2.19% to 2.55%, an increase of 0.36%; the two-year fixed rate will also rise from 2.59% by 0.36% to 2.95%。

Rates for 6 months, 18 months, 3 years, 4 years and 5 years have all risen by 0.30%.

Today, after ASB again announced higher mortgage rates, its executive general manager of retail banking, Craig Sims, said: ‘New Zealand’s economy is recovering strongly. Although interest rates are now rising, they remain historically low.’ This statement suggests the bank believes historically low interest rates still have room for “increases”, also implying that rates will continue to rise.

Craig Sims said:

‘We recognise that this year’s first-home buyers are experiencing an exceptionally low interest rate environment for the first time, and many people worry that higher rates will put pressure on their repayments. In fact, when assessing these first-home buyers’ mortgage applications, we use a “test rate” well above current mortgage rates, so they can continue to afford their loans if rates rise.’

 

 

Bank urges customers to decide on mortgage rates promptly

 

ASB said today: “Customers concerned about further rate rises are encouraged to contact the bank to choose the best option from current mortgage rates.”

“We encourage customers to discuss their interest rate options with us. These may include splitting their mortgage across different loan terms to minimise additional costs while rates are very low.’ Sims said.

 

Alongside today’s mortgage rate increases, ASB also adjusted its 6-month term deposit rate to 1%, making it the most popular short-term deposit rate currently available.

The three-year term deposit rate saw the largest increase, from 1.40% to 1.70%. The four-year rate rose from 1.6% to 1.85, and the five-year rate from 1.75% to 2%. The six-month rate will also increase from 0.80% to 1%, while the two-year rate will rise slightly from 1.3% to 1.4%.

ASB currently offers innovative mortgage products for customers buying new builds, including a reduced one-year new-build mortgage rate of 1.79%. It also provides comprehensive mortgage calculators and tools to help customers budget.

Notably, this afternoon at 2 h, the Reserve Bank formally announced that OCR(Official Cash Rate) would remain at 0.25%, unchanged. However, judging by ASB’s ‘actions’ today, OCR may rise in the near term。

Information released by the Reserve Bank today indicates that it will halt large-scale asset purchases before 23 July, also signalling that it is tightening monetary policy.

 

Earlier than expected——0CR may rise next month

The industry had previously expected the Reserve Bank to adjust the 0CR early or midway through next year. In fact, policymakers have not followed industry expectations.

Last week, the Reserve Bank said it would formally announce its OCR decision this Wednesday, today. Although the Official Cash Rate remains unchanged at 0.25%, industry observers expect its increase to come earlier, possibly in August, given the bank’s current series of monetary tightening measures. This also means mortgage rate increases by the major banks will follow closely, and today ASB has already set an industry “example”。

Back in March 2020, when the Reserve Bank of New Zealand announced an OCR cut to 0.25%, other commercial banks acted quickly over the following week to lower mortgage rates. An impending OCR increase will likewise trigger another round of rate rises.

Earlier this year, economist and strategist John Carran warned borrowers that mortgage rates could start rising from the end of this year, putting pressure on people who have taken on substantial debt in recent years. In fact, the wave of rate rises has arrived before year-end.

 

OCR increases and their butterfly effect

As we know, as the Official Cash Rate, OCR represents the wholesale cost at which New Zealand’s commercial banks borrow from RBNZ (the central bank). OCR changes most directly affect mortgage rates, with the greatest impact on floating mortgage rates, while also influencing short-term fixed mortgage rates. 

Currently, most New Zealand banks’ fixed mortgage terms are one to two years or shorter. The many signals suggest that if OCR is adjusted soon, it will demonstrate that the era of low interest rates is approaching an early “arrival at” its end。

 

Higher mortgage rates will increase repayments

Reserve Bank lending data shows that residential property lending in New Zealand stood at NZ$313,000,000,000 in April 2021, up from NZ$266,000,000,000 in April 2019. Mortgage debt grew by more than 17% in just two years. A rate rise would have a significant impact on borrowers.

Let us run the numbers, using Auckland’s current average house price of 1,200,000 New Zealand dollars as an example. Suppose the buyer pays a 20% deposit and takes out a 30-year mortgage for the remaining NZ$1,000,000. With major banks’ current one-year fixed rate at 2.25, fortnightly repayments would be NZ$1481. If the mortgage rate rises by 0.5 percentage points, fortnightly repayments will rise from 1481 New Zealand dollars to 1582 New Zealand dollars, an increase of 101 New Zealand dollars (an additional NZ$1212 a year). Borrowers with higher-value homes will face even greater repayment pressure.

A stronger New Zealand dollar

Similarly, Stats NZ data shows that inflation continued to intensify in the first quarter of this year. For the central bank to keep annual inflation within its target range of 2, an earlier OCR increase would be understandable.

An OCR increase by the Reserve Bank of New Zealand would also mean a stronger New Zealand dollar against the US dollar.

Stable prices

 

An OCR cut lowers borrowing costs between commercial banks and the central bank, rapidly channelling large amounts of money into the market and intensifying inflation. Conversely, an OCR increase also means tighter monetary policy from the central bank, lowering inflation and helping stabilise prices.