Inflation basically means your dollar will not go as far today as it did yesterday. Inflation erodes purchasing power. Inflation can be especially tough for people on lower and fixed incomes. For the better off, inflation means cuts to discretionary expenditure. Inflation makes it tricky for businesses and households to plan. Inflation is difficult for those companies that are forced to absorb cost increases and take a hit on their profit margins.
The cure for inflation? Many experts believe the way to break the back of inflation is economic shutdown: to try and slow demand.
What has inflation got to do with my mortgage?
The Reserve Bank is trying to calm inflation, which is currently running at a 31-year high, with some quite aggressive interest rate hikes. They are upping the official cash rate (OCR) and have made five OCR increases in the last 10 months.
The Official Cash Rate (OCR) is the interest rate set by the Reserve Bank. It is essentially the wholesale price of borrowing or lending money in New Zealand, and it influences all other interest rates in the country.
How high will the OCR go?
That is of course the million-dollar question, and yes, a crystal ball would be incredibly useful. At Global Finance, our team is in agreement with many other New Zealand financial experts, and we predict the OCR could go to around 4% this time next year.
Is the OCR rate the same as my home loan interest rate?
No, sadly it is not. Banks aren’t in the business of lending money just to be helpful. Historically, the retail interest rates offered by banks sit at about 2% higher than the OCR.
What will happen to the interest rate on my mortgage?
We predict that the one-year home loan interest rate will be sitting at 6% by mid-2023. If we extrapolate from that prediction, the two-year rate will be at about 6.5% and the five-year rate will be around 9%.
How long will mortgage interest rates be that high?
When the RBNZ is confident inflation is under control, it will start reducing the OCR. Our crystal ball, if we had one, would tell us that retail interest rates will again settle to about 4% by mid-2025 or 2026.
If you’re looking to fix your home loan, we would suggest you do so for longer term to give yourself comfort that your repayments will not change in the near future.
All these predictions are of course dependent on a myriad of factors, a recession not being the least of them.
What is a recession?
When the country’s economy (GDP) shrinks for six months, it’s a recession. One of the many jobs of The Reserve Bank is to try and slow inflation without crippling the economy. If they push up interest rates more than needed, it can lead to a recession. A tricky balance to find as domestic inflation could slow due to the changes they implement, but overseas factors that New Zealand cannot control, such as supply chain problems, the economic disruption caused by Covid-19 and rising energy and food prices resulting from the Russian invasion of Ukraine could continue to put pressure on prices here.
Informed decisions about your financial future
We’re at a time of heightened global economic uncertainty and high inflation. With interest rates on the rise, now is the time when people could most benefit from the help, support, expertise, and advice on offer from our financial advisers.
If you need to take out a mortgage or refix an existing home loan, it is important you talk through your mortgage options with us. We’re here to help.
**These are general guidelines and are by no means a reflection of bank or lending policies