Industry watch: rates rise across the board as the “battle” against inflation intensifies!

Following repeated signals of monetary tightening from the central bank last week, all four of New Zealand's major commercial banks have now increased their mortgage rates. The size of ASB's and ANZ's increases suggests that rates exceeding three per cent are all but becoming a consensus among the major banks.

 

Inflation hits a ten-year high;

the central bank tightens monetary policy as banks raise rates across the board 

New Zealand's CPI rose 1.3% in the three months to the end of June, while annual inflation reached 3.3%, a 10-year high. Industry professionals and economists have been predicting that the Reserve Bank of New Zealand will raise the Official Cash Rate (OCR) in August to stabilise inflation.

Last week, the Reserve Bank of New Zealand announced a new round of monetary measures. Alongside holding the 0CR steady at 0.25%, it will halt its large-scale asset purchase programme. This major announcement directly signals the central bank's confidence and determination to tighten monetary policy. 

In fact, ASB had already moved first to raise mortgage rates before the central bank's announcement that day. Last Friday, New Zealand's other three major commercial banks followed suit, all announcing mortgage rate increases.

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The central bank has now made clear that it supports the major banks' plans to increase rates, stating: “Any future increase in mortgage rates will further restrain house price growth.” This move not only helped strengthen the New Zealand dollar this week, but also reassured the major banks about raising rates.

Investors and borrowers should note that all four major commercial banks in New Zealand have now announced rate increases, with only Kiwibank yet to announce any changes to its interest rates. It is expected that Kiwibank will join the rate increases this week. For borrowers, therefore, these next couple of days represent the final low-rate “window”, and time is running very short.

 

An increase of more than 40 basis points: BNZ makes the largest increase this round

Of the four major banks' decisions in this round, only ANZ's increases were relatively moderate, while BNZ and ASB made the largest increases.

BNZ raised its one-year rate by 36 basis points to 2.55%; its 18-month rate saw the largest increase, rising overnight by 44 basis points to 2.79%; its two-year rate also rose by 40 basis points to 2.95%。 

Meanwhile, ASB also made its largest adjustments this year to its one-year and two-year fixed rates: the one-year fixed rate rose 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%.

The two banks' current rates are now at the same levels. 

ANZ's one-year rate rose 31 basis points to 2.50%; its 18-month fixed rate rose 39 basis points to 2.74%; its two-year rate is 2.90%, up 31 basis points; and its 3-year rate is now 3.24%, up 25 basis points. 

As New Zealand's largest home lender, ANZ has left its 4-year and 5-year fixed rates unchanged for now. Following this round of increases, its rates are broadly in line with ASB. 

Westpac raised its June-term rate by 30 basis points to 3.29; its one-year rate saw the largest increase, rising 36 basis points to 2.55; its 18-month, two-year and three-year rates each rose 30 basis points, to 2.75%, 2.89% and 3.29% respectively.

The bank said, “It is winter now, and property sales volumes have dipped slightly. We believe this is a good time to raise rates. Although this round of increases is a little steep, it will also allow us to offer customers ‘specials’ and ‘discounts’ when the busy spring property season arrives.”

 

 

The social effects of prolonged low interest rates

Every round of monetary easing and rising asset prices brings a major reshuffling of society's wealth.

Prolonged low interest rates reduce borrowing costs, sending large amounts of cheap money into capital markets, with shares and property the preferred destinations. As cheap capital accumulates in society over time, asset prices ultimately soar and property bubbles grow, readily triggering a financial crisis.

The global financial crisis of 08 remains fresh in our memories. With the United States pursuing unprecedented monetary easing, a decade of excessive debt eventually erupted into a major global financial crisis.

Prolonged low interest rates not only put large amounts of cheap money into the hands of the wealthy, but also widen the wealth gap and further entrench social divisions. Ultra-low interest rates sharply reduce borrowing costs, encouraging the wealthy to borrow heavily to buy assets and easily accumulate wealth.

Low interest rates are also a direct culprit behind inflation. The middle class and the poor, in particular, end up “footing the bill”. Without surplus assets in their portfolios, they miss out on the gains from rising asset values as prices increase, while the wealth they hold steadily shrinks.

 

 

Construction becomes inflation's biggest “contributor”

Meanwhile, persistently low interest rates over the past year have intensified inflation in New Zealand and sent house prices soaring. Reining in inflation will be the central bank's top priority this year. 

Data released by Stats NZ last Friday showed that the quarter-on-quarter increase in CPI rose from 0.8% in the first quarter to 1.3% in the quarter ending June, with annual inflation reaching 3.3%, its highest level in a decade, since the year 2011, month 6. This inflation rate has exceeded the central bank's monetary policy target range of 1% to 3%.

The much higher-than-expected inflation figures have fuelled speculation that the Reserve Bank of New Zealand could raise the OCR as early as next month.

Stats NZ senior manager Aaron Beck said, “The cost of building new homes was the largest contributor to inflation this quarter, rising annually by 7.4% and this quarter by 4.6%；Housing and household utilities prices rose 1.9%, with raw materials making the largest contribution; housing rents rose 0.9%; food prices rose 1.5%; and transport prices rose 2.2%. Price increases across these major sectors pushed overall inflation higher.

Industry analysts say the Reserve Bank of New Zealand remains concerned that, under the current exceptional circumstances of the pandemic, high inflation could become permanent. Its recent moves to tighten monetary policy were therefore to be expected.

A full-scale “defensive battle” to stabilise inflation is now under way.