As widely expected, the Reserve Bank has increased the Official Cash Rate by another 0.25%, taking it from 2.50% to 2.75%.
This is the second consecutive increase following July’s move, with the Reserve Bank continuing to remove monetary stimulus as it works to bring inflation back towards its 2% target.
Importantly, today’s announcement suggests the job may not be finished yet.
The Reserve Bank says it may need to increase the OCR further this year, with future decisions dependent on how inflation and the wider economy develop.
The big question: where does “neutral” actually sit?
This is where things get particularly interesting.
The neutral OCR is essentially the level where interest rates are considered neither stimulatory nor restrictive to the economy. The Reserve Bank has commonly talked about neutral being around 3%, but estimating neutral is far from an exact science.
That uncertainty is reflected in the very different views amongst economists.
Kiwibank has described today’s move as the second in a likely three-step move to 3%, while BNZ takes a considerably more aggressive view and believes the OCR could ultimately need to reach 4% next year.
That is a significant difference – and potentially an important one for mortgage borrowers.
New Zealand households are also carrying considerably more debt than in previous decades, meaning a 3% OCR today can have a very different impact on household cashflow and spending than the same OCR historically.
It is also worth remembering that fixed mortgage rates don’t move perfectly in tandem with the OCR. Wholesale rates and financial-market expectations about where inflation and the OCR are heading are important factors in bank pricing.
So while today’s 0.25% increase was widely expected, the much more important question is:
Will 3% prove to be enough? Now could be a good time to review your mortgage.
Regardless of where the OCR ultimately peaks, we think the current environment provides a good reason to review your mortgage rather than simply set and forget it.
A mortgage review isn’t just about finding a lower rate. It can identify whether your loan is structured appropriately, whether your upcoming refix strategy makes sense, whether refinancing could be worthwhile and whether your cash or available equity could be working harder for you.
We’ve put together 7 reasons to review your mortgage – even if you think it’s sorted.
Book a free mortgage review and we’ll check your rates, structure and refix options before the
next move. Or call us on 09 486 4719.