The most recent OCR move won’t impact interest rates that much. That sounds controversial, but there are two reasons for this:
1) The hike is mostly priced in
Banks (and the places they borrow money from) set their interest rates based on what they think will happen in future.
So, if banks (and financial markets) think that the OCR will go up in future, they set today’s interest rates on that basis.
That’s why last week’s OCR increase had little impact on mortgage interest rates.
We were all already expecting an 0.75% increase. So, it was already priced in.
You might think … “then why did ANZ and Westpac just lift all their interest rates by about 0.5%?”
Because interest rates adjust based on new information.
Before the announcement, the financial markets thought the OCR would peak at about 5.1%.
But with the Reserve Bank saying it’ll go up to 5.5% … that’s the new information.
This week’s OCR rise wasn’t the critical info … so rather than ‘pricing in’ a 5.1% OCR, markets will price in 5.5%. A 0.4% increase.
And that’s why we’re not going to see interest rates get up to 9-10%.