The largest hike in the official cash rate for over 20 years won’t necessarily bring an immediate solution to the increasing cost of living crisis, one Māori economist says, but it is hoped it might slow down rampant inflation.
Reserve Bank governor Adrian Orr yesterday raised the OCR by 50 basis points, to 1.5%, the largest single hike since 2000. The bank exists to ensure price stability, and keep the economy humming. it uses the OCR as a tool, setting it as an interest rate that influences all other interest rates and is, in effect, the wholesale price of borrowing or lending money in New Zealand.
Matt Roskruge (Ngāti Tama, Te Āti Awa), co-director of Te Au Rangahua at Massey University, says Orr's rake hike intention is to make borrowing or lending money more expensive and decrease demand.
With the inflation rate continuing to outstrip wage rises, and now sitting at 5.9%, the cost of living has become a calamity for many whānau facing paying much higher prices for food and other necessities.
“What the Reserve Bank is trying to do here is shortcircuit that inflation by increasing the cost of borrowing and taking some of the money out of the system," Roskruge says.
Mortgage-payers take a hit
“That should then slow down the price growth because we're not all bidding against each other to buy stuff. That's its game, to make money more expensive to slow down spending to slow down inflation.”
The greatest impact will be seen on mortgage rates. Some banks have already lifted their interest rates to reflect yesterday's announcement.
Those already with mortgages could see a severe increase in costs, while those looking to get on to the property ladder could find themselves even further away from their goal.
“Paychecks are not going as far as they used to, the cost of necessities is going up. That leaves less money to service a mortgage but, at the same time, the cost of servicing that mortgage is going up.
“Instead of being able to borrow at 3%, we are now borrowing at 5%.
“That makes it even more difficult from an income perspective to get into housing.”
Good for deposit-savers
Roskruge says the flip side is investors or prospective homeowners may see that extra expense as too risky and prices could fall, which could be good news for those who are saving for a deposit.
“It's interesting in that, from an income perspective, it will be tougher to get into your first home but from a wealth perspective, it might make it a little bit easier.
“People who are getting close will probably find it a bit easier because they won't have to have that huge deposit. But it's still a long way from making housing affordable.”
The increase in interest rates is good news, however, for those saving money, with banks expected to increase rates on term deposits, so those people able to save money will see a greater return. ANZ is lifting its term deposits by between five basis points and 25.
“Savers are going to find they're getting a little bit more in their pocket but, at the same time, people who are borrowing for mortgages, using a credit card, some of those other loans, you might see the interest rates come up a bit on those.”