The OCR hasn’t risen, so why has your mortgage already become more expensive? Today’s decision finally provides the answer: New Zealand faces a ‘hidden rate rise’
After a week of waiting, the market finally has its answer from the Reserve Bank of New Zealand.
After a week of waiting, the market finally has its answer from the Reserve Bank of New Zealand.
On the afternoon of 27 May, the Reserve Bank officially announced it would hold the Official Cash Rate (OCR) at 2.25%.
The outcome was broadly in line with market expectations.
But what really deserves attention is the stronger signal in the Reserve Bank’s latest Monetary Policy Statement:
Interest rate rises are very likely to arrive sooner than the market previously expected.
The Reserve Bank expects New Zealand inflation to peak at 4.3% in the September quarter this year, and not return to the 2% midpoint of its policy target until the middle of 2027.
More tellingly, the decision was not unanimous.
Of the Monetary Policy Committee’s 6 members, 3 supported holding rates and 3 favoured an immediate increase of 25 basis points. The OCR ultimately remained unchanged only after Reserve Bank Governor Anna Breman cast the deciding vote.
This suggests today’s hold is more of a brief pause that leaves room for future rate rises.
Even before the Reserve Bank announced its decision, Westpac had taken the lead in raising several fixed mortgage rates. In hindsight, this was no market overreaction: commercial banks had already begun repricing for a higher interest rate environment.
Although the OCR has not risen, your mortgage has already entered a repricing cycle.
Commercial banks have already moved
Westpac recently announced changes to several fixed mortgage rates effective from 22 May.
Its one-year, 18-month, three-year, four-year and five-year fixed rates all increased, with its 18-month rate becoming the first quote from a major bank to exceed 5% in this cycle.
Although Westpac kept its two-year fixed rate unchanged, leaving it alongside BNZ among the lowest offers in the market, the message from these adjustments is already clear:
Banks are pricing ahead for a higher interest rate environment.
In fact, New Zealand’s fixed mortgage market has been quietly changing over the past half-year.
Late last year, major banks’ special two-year fixed mortgage rates briefly fell to around 4.5%.
Today, mainstream market offers have risen to around 5.2%.
On the surface, that is a change of just 0.7 percentage points. But for a NZ$800,000 mortgage over 30 years, the monthly repayment burden has already increased noticeably.
Why have banks moved before the OCR?
Many people are accustomed to directly equating mortgage rate changes with the OCR. In reality, fixed mortgage rates are driven more by wholesale funding markets, where swap rates are the most important benchmark.
Koura Wealth founder Rupert Carlyon notes that New Zealand’s two-year swap rate has risen by around 70 basis points since March this year.
By comparison, banks’ advertised two-year mortgage rates have risen by only around 20 basis points. This means banks have yet to pass the full increase in funding costs on to borrowers.
Squirrel chief executive David Cunningham estimates that, based on current swap rates, the theoretical two-year fixed mortgage rate should be closer to 5.4%.
In other words, there is still room for rates to rise further as they catch up.
Why has the Reserve Bank chosen to wait?
The Reserve Bank is still weighing inflation pressures against economic growth. On one hand, continuing tensions in the Middle East and volatile global energy prices are increasing the risk of imported inflation. On the other, New Zealand’s domestic recovery remains fragile.
Kiwibank chief economist Jarrod Kerr believes this round of price increases looks more like a supply shock than overheated demand.
He says: ‘This is not the broad-based expansion in demand seen during Covid, but a supply shock that will squeeze consumption and destroy demand.’ In other words, raising rates too quickly now could further weaken economic activity that is already slowing.
But moving too slowly could allow inflation expectations to drift further out of control. This is the central dilemma facing monetary policy.
The market is already looking to September
Despite holding rates this time, the Reserve Bank also made clear:
The OCR will very likely need to rise earlier and by more than projected in February.
Latest market pricing shows a marked increase in the probability of a 25-basis-point rise in September, with expectations of another increase before year-end also strengthening.
Westpac chief economist Kelly Eckhold has even said publicly that the Reserve Bank should have raised rates immediately at this decision. In his view, with inflation certain to remain above 4% over the coming quarters, monetary policy should return to a neutral setting more quickly.
This means the question the market really cares about is: when will the first shot be fired?
United Lending’s perspective
As the market turns its attention to July, September and possible further policy changes in the second half of this year, many households with mortgages are asking the same question:
If the interest rate environment continues to evolve, what should borrowers be paying closest attention to now?
With markets still continually repricing, the combined signals emerging from a series of key windows over the coming months deserve sustained attention, beyond simply watching an individual Reserve Bank rate decision.
These signals come from official Reserve Bank policy statements, the pace of changes to banks’ fixed-rate offers, movements in wholesale rates, and evolving market expectations for inflation and economic performance.
The impact will differ between borrowers. Loan maturity dates, lending structures, household cash flow and individual tolerance for future interest rate fluctuations will all influence the eventual response.
In the current environment, growing numbers of borrowers are taking a more active look at how they allocate loan terms, choose fixed-rate periods and preserve future cash flow flexibility.
However, significant differences in each household’s finances, income structure and appetite for risk mean there is no universally applicable answer.
With a busy schedule of Reserve Bank rate reviews over the coming months, faster bank rate adjustments and potentially continuing shifts in market expectations, borrowers should discuss their circumstances thoroughly with a registered financial planner or professional mortgage adviser before changing their loan structure, rather than deciding solely on market sentiment or short-term trends.
Uncertainty is clearly the defining feature of the current market. In an uncertain cycle, fully understanding your financial capacity and making a judgement suited to your circumstances, informed by professional analysis, often matters more than predicting the direction of rates.
Perhaps the real question for New Zealand borrowers in the period ahead is not simply whether interest rates will change further, but whether they are ready to respond.