Property Investment

3 min read

Private property issue #33- OCR increase again

It happened again. The Reserve Bank announced another OCR hike to 3.5% (up by 0.5%). This is to continue its battle against inflation...


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Private Property – our weekly newsletter that gives you insights into what's happening in the NZ property market. Written by managing director Andrew Nicol. Sign up to receive this in your inbox every Thursday.

In the battle to stop runaway inflation, the Reserve Bank has announced another increase in the OCR (Official Cash Rate).

So you’re probably wondering what this means for your mortgage interest rate … and when it will stop.

Why is the reserve bank increasing interest rates?

Inflation is running hot at 7.3% – the prices of things we buy, from electricity to groceries at the supermarket, are rising.

This is way outside the central bank’s 1-3% target. Take a look at the graph below.

So, the rate went up another 0.5% and now stands at 3.5%.

“When are interest rate increases going to stop?”

Interest rate increases will stop once it looks like inflation is coming down.

And it looks likely that inflation will likely come down next time the data is released in November.

Here are the inflation forecasts from the 8 major financial institutions of the country, overlayed on each other.

This includes forecasts from the 5 major banks (ANZ, BNZ, ASB, Westpac and Kiwibank), the Treasury, the Reserve Bank and the NZ Institute of Economic Research.

You can see from the graph that there is a clear consensus among economists that inflation will likely come down.

Every one of those institutions expects inflation to be lower next time the numbers are announced.

The most optimistic institution thinks inflation will be back within the Reserve Bank’s target band by June 2023.

The most pessimistic institution thinks it’ll take until March 2025.

“Does this mean the OCR will drop in november?”

Probably not.

We’ll likely see another increase in November (up to 4%). This is the Reserve Bank’s last opportunity to change the rate for the year.

After that, there will be a pause until February 2023, when the Reserve Bank next has an opportunity to change the rate.

This will give the central bank time to ask, “what impact has the OCR had?”

Either 1 of 2 things will happen –

Scenario #1 – Inflation will have started to come down.

Scenario #2 – Inflation will have stayed steady or will have kept going up.

If scenario 1 plays out (as the forecasts expect), the OCR will likely stay steady before it starts coming down.

If scenario 2 happens, The Reserve Bank will likely raise the OCR again.

“What’s the impact on interest rates?”

Not as much as you might initially fear.

For instance, since the announcement:

  • ANZ lifted its floating rate by 0.5%
  • The 1-year interest rate has had no change

And that’s because the OCR doesn’t directly impact mortgage interest rates.

Banks aren’t borrowing from the Reserve Bank to lend on your mortgage. Instead, they borrow at wholesale rates.

And the wholesale rate has gone up 0.12% since the end of September. The OCR will indirectly impact the wholesale rate. But, these markets have likely already priced in these OCR increases.

“How long should I fix my interest rate for?”

If it were me, I’d be fixing for the 1-year rate now. Maybe, for 2-years, if your broker negotiated an attractive rate.

My interest rate forecasts remain as follows:

“So, when’s it all going to stop?”

We will see inflation back within that target band of 1-3% by early 2024.

So by the end(ish) of next year, we should see the OCR start coming down as the economy cools down.

If you want to learn more about OCR increase in detail, listen to The Property Academy Podcast episode released today.

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Andrew Nicol

Managing Director, 20+ Years' Experience Investing In Property, Author & Host

Andrew Nicol, Managing Director at Opes Partners, is a seasoned financial adviser and property investment expert with 20+ years of experience. With 40 investment properties, he hosts the Property Academy Podcast, co-authored 'Wealth Plan' with Ed Mcknight, and has helped 1,894 Kiwis achieve financial security through property investment.

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