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National | Economy

Reserve Bank forces up interest rates again; predicts house prices will plummet

People with mortgages or who pay rent will bear the brunt of the Reserve Bank’s decision today to lift the official cash rate by 50 basis points to 4.75%.

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.

Today’s decision will hurt homeowners particularly. Many will have to re-fix their mortgages this year at higher rates but they will also be watching their home values plummet as the central bank struggles to control inflation.

In fact more than 410,000 New Zealanders were behind in their payments in December in the wake of higher interest rates and cost of living rises, data from credit agency Centrix shows.

House prices have fallen by 15.2% since the peak in November 2021.

The bank is predicting they will continue to fall in 2023, consistent with very low sales volumes in recent months and won’t start rising again until the second half of next year.

Bad weather ahead

The bank thinks its inflation-stomping battle will be harder given the weather events of recent weeks.

Its monetary policy committee says the storms led to destruction and disruption across a variety of industries and infrastructure.

“This will lead to shortages in some goods and services in the near term, and upward price pressures are likely to stay high as a result. Rebuild work will increase activity over coming years.”

But it says it is too early to accurately assess the monetary policy implications of the weather events, given the scale of destruction and economic disruption are only now becoming evident.

“The timing, size, and the nature of funding the government’s fiscal response are also yet to be determined.”

The committee says significant economic losses have resulted and it defensively claims: “The best contribution monetary policy can make right now is to free up resources elsewhere in the economy by slowing demand through higher interest rates.”

Inflation ‘too high’

It also says inflation remains widespread and too high, at an annual rate of 7.25 (though it had itself predicted it would be 7.5%).

Measures of core inflation, which strip out prices that are volatile like fuel and food, have also remained elevated

It’s not expecting headline inflation to decline significantly until the second half of this year.

The Reserve Bank had considered again raising the official cash rate by 75 points, as it did in November. That was a record raise.