Squirrel: Triple OCR Hike to Tip NZ into Recession

It happened. As expected, the Reserve Bank of NZ announced a whopping 0.75% increase to the official cash rate, bringing it to 4.25%.

I had been optimistically hanging out for a 0.50% rise, on the basis that the RBNZ would surely see the harm coming our way. In their accompanying statement it’s clear that they can see the damage coming, and did it anyway, with an acknowledgement that this move will tip New Zealand into recession next year.

The RBNZ’s forecast is now for the OCR to peak at 5.50% by the middle of next year, up from their 4% view, in the August update. In addition, the OCR is not forecast to start decreasing until the middle of 2024, almost two years away. Albeit market rates will move ahead of the RBNZ, up and down.

This is a shift upward in their view, which will push short term fixed rates up

The market had anticipated a 5% peak, so this is higher. One-year fixed mortgage rates will likely increase by 0.5%, from 5.99% to around 6.49% off the back of this, and two-year rates are likely to go up about 0.3%. Longer term fixed rates should largely stay unchanged, making in some cases longer-term rates cheaper than short-term rates.

“If you have held off locking your mortgage in, lock in now before banks move their rates up in the next few days.”

But be careful of fixing into longer-term fixed rates simply because they are cheaper.

When rates do eventually fall, these loans will potentially have large break costs. This is not something we’ve seen in this market since the Global Financial Crisis, but many borrowers who have been around for a while will have experienced this. Fixing for longer is okay, but only if you aren’t planning on breaking by selling the property, or trying to shift to lower rates when they do eventually fall.

How high are mortgage rates expected to go now?

In the RBNZ’s view, the new OCR forecast will push up rates to peak between 6.5% and 7%. There is still a lot of uncertainty going into 2023.

My view remains unchanged that the economy will slow quickly as discretionary spending freezes at the same time as consumers experience a $300 billion drop in the value of their homes. We also have a very slow housing market, which is making it difficult to sell when people need to, and there’s also a likelihood of higher unemployment.

We’re already starting to see this play out at the coal face, so it’s only a matter of time before recession does bite.

If you are a small business owner, I have huge empathy for the challenge ahead, managing through a recession at the same time as handling lower demand and higher borrowing costs.

Remember, this is only a forecast and we are still near peak rates

The Reserve Bank is forecasting the economy to slow next year. Depending on how that goes over the next six months will determine how far out we are from seeing a reprieve on the rate front.

My view hasn’t changed that we will see a change in the outlook on rates towards the end of next year. That is sooner than the RBNZ’s own view that rates won’t start falling until mid 2024. Watch this space!