OCR continues to rise despite recent weather events

OCR continues to rise despite recent weather events

Stop sign in flood waters

Before the recent flooding in Auckland, Northland, and the East Coast of the North Island, the general expectation in financial markets was that the Reserve Bank would no longer need to increase the official cash rate by 0.75% this month but would be able to get away with 0.5%. This easing in the rate rise expectation was mainly attributable to some weaker-than-expected wage and employment numbers along with the very low levels to which business and consumer confidence and spending measures had fallen after the last tightening of monetary policy and warning of recession on November 23.

Following the recent flooding, some people were of the opinion that the economy would suffer badly, recession would be guaranteed, and the need existed to at least stop raising interest rates if not cut them.

But terrible as the events are for the people on the ground in these regions, there are some important points to note.

First, the flooding impact in the affected regions was highly localised and while most people suffered the loss of electricity for a few days, the numbers who were directly hit by flooding and siltation appears small – images of destruction notwithstanding.

Second, Northland accounts for 2.5% of New Zealand's GDP and the Hawkes Bay and Gisborne regions collectively just over 3.5%. Monetary policy is set for the entirety of the economy and not for one or two regions, and therefore it is what is happening in the other 94% or so of the economy which matters when it comes to the outlook for economic growth, inflation, and monetary policy.

Third, the immediate impact of the appalling weather is to decrease economic activity. But this impact will pass relatively quickly to be replaced by an economic stimulus as reconstruction and long term strengthening of infrastructure is undertaken. The weather events have made New Zealand a poorer country but in aggregate they will boost economic activity and therefore place extra upward pressure on wages over the medium term.

The Reserve Banks prediction for the peak in the official cash rate remains at 5.5%.

That said, they now anticipate hitting that level two to three months further out than indicated back in November. They also still do not anticipate cutting interest rates until the second-half of 2024.

Borrowers on floating interest rates can reasonably anticipate that their cost will increase 0.5% in the very near future with up to another 0.75% to come by the middle of the year. Fixed mortgage rates however, as explained here recently, reflect market expectations for what the Reserve Bank’s official cash rate is going to do over the relevant period of time rather than where it sits at the moment.

Those expectations remain that monetary policy will start to be eased early next year, and because these expectations are practically the same as what they were before the most recent cash rate review, it is unlikely that banks will be raising their fixed mortgage rates in the near future.

In fact, the opposite is happening though not in the public eye. Banks are failing to meet their mortgage sales targets because of the fall in residential real estate sales towards the lowest levels since the global financial crisis. In order to protect market share and try to maintain ability to drive profits through sales of non-mortgage products banks are heavily discounting some of their short term fixed lending rates - but without advertising them.

One bank for instance is offering a 4.99% one year fixed rate with no cashbacks

Another is offering a 5.99% fixed rate for periods of 18 to 24 months with cashbacks up to 1%. Another is now accepting applications for mortgage financing where the deposit is as low as 10% of the property’s valuation.

These are still very uncertain times for inflation and therefore interest rates, and perhaps the best word of advice I could give is this.

Don't believe anyone's predictions for where interest rates are going to go.

None of us have experience of what happens in a post pandemic environment. Take all interest rate forecasts with a grain of salt and discuss your financing requirements closely with an experienced mortgage advisor.

To sign-up to my free weekly Tony’s View publication go to www.tonyalexander.nz.

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