Mortgages, rents the collateral damage as Reserve Bank attacks inflation head on

By Deborah LaHatte

The Reserve Bank Te Pūtea Matua guaranteed a miserable Christmas for mortgage holders today by lifting the official cash rate (OCR) higher in one go than ever before in a bid to smash inflation.

Not only a Christmas Grinch, the central bank also said its forecasts showed it would need to lift the OCR again next year.

But the rise won't be a complete shock since most bank economists predicted the size of today's lift.

The OCR is set by the Reserve Bank to influence the interest rates banks attach to their loans to homebuyers and businesses.

If it rises, the banks pass that rise on to their customers as their mortgages come off fixed-term rates.

That also gets passed on to landlords who increase rentals.

Earlier this year property analytics firm CoreLogic rising mortgage interest costs were expected to hit many homeowners, with 48 percent of mortgages needing to be refinanced over the year ending March 2023. That means just under half of mortgage holders will see sharp increases in their loans by next March.

Targeting spending

The Reserve Bank lifted the OCR today by 75 basis points to 4.25% and it indicated it is forecasting the OCR peaking at 5.5% in September next year. This was the biggest single increase ever made by the bank.

"Core consumer price inflation is too high, employment is beyond its maximum sustainable level, and near-term inflation expectations have risen," the bank’s monetary policy committee said.

It said it had agreed the OCR needed to reach a higher level, and sooner than previously indicated, to ensure inflation returns to within its target range over the medium term. The bank is required to keep inflation between 1% and 3%.

The committee looked at possible increases of 50, 75 and 100 basis points and decided the 75 basis points rise was appropriate given the resilience of domestic spending and the higher and more persistent actual and expected inflation outcomes, according to its minutes. 

“Committee members agreed that monetary conditions needed to continue to tighten further, so as to be confident there is sufficient restraint on spending to bring inflation back within its 1-3% per annum target range,” it said.