In an article back in November 2021 I wrote about the OCR being raised for the first time in seven years to 0.75 per cent.
Surprising perhaps no one (given the inflation situation) it has continued to climb and has now risen by 50 basis points to 2.0 per cent. This latest change signals the first time the OCR has been raised by 50 basis points twice in a row – ever.
RBNZ is saying we’ll see the OCR peak at 3.9 per cent in mid 2023, rather than the previous forecast of 3.4 per cent in mid 2024. It’s set to remain elevated until September 2024, when it will gradually begin to ease to 3.5 per cent in June 2025.[i]
Essentially, the OCR’s function is to influence prices in the economy and ensure stability. Price stability means economic growth occurs more easily, which is absolutely what we want. The rising inflation we’re seeing at the moment threatens this because our money loses its buying power, and volatility starts to increase – so there’s more risk involved in taking on debt, and people tend to change their financial behaviours to reflect that.[ii]
When inflation is high, monetary policy becomes a blunt instrument capable of heavy blows. Particularly to those who have large debt, like mortgagees. These proverbial summer children now face a long, cold winter as their rates continue to rise. Even those who snagged fixed rate deals before the hikes started in earnest will be nervously anticipating their reviews, around half of which will be reviewed before next winter.[iii]
"If mortgage rates rise as forecast, there is a risk that a noticeable number of households that borrowed for the first time in 2021 will find it difficult to pay their mortgages and cover all their other usual expenses. This is because a 6% mortgage rate is close to the level at which borrowers were tested [by banks] during the COVID-19 period. There is a risk that these borrowers will need to cut back spending by more than currently assumed to meet their higher debt-servicing costs," the RBNZ says.[iv]
While property costs are slowing in some areas and predicted to gradually drop across the board, the increase in rates is could make would-be borrowers either pause of their own accord – assuming they have a deposit and get approved for a loan in the first place.
While Kāinga Ora’s new guidelines may theoretically help more people into homes on lower deposits, there’s still experts warning of bank-related hurdles to this process. So technically more new home owners could buy with a 5 per cent deposit instead of the usual 20 per cent... but in practice, getting the loan approved is still largely at the discretion of the bank and the stress tests they run to see whether applicants could service that loan in future.[v]
We’re also now getting reports about rent being at an all-time high, with TradeMe’s latest rental price index (RPI) showing the national median weekly rent at $580, making it 7 per cent up on the same period last year. For reference, the RPI places the median rent in Hawkes Bay at $565.[vi]
But we know all this. New Zealanders have been watching prices climb in various essential areas – food, fuel, bills, mortgage payments – for a while now.
Consumer inflation is meant to be within the 1 to 3 per cent range. This is what RBNZ is tasked with. If the OCR is RBNZ’s main tool to control inflation, it’s little wonder they’ve come out swinging in response. From the Monetary Policy Statement, RBNZ have indicated they’re going larger, earlier, to try and get ahead of persistent inflation.[vii]
And again, as frustrating as it is to hear – time will tell if this is successful.
In the meantime, now is a good time to make sure you have a solid, realistic grasp on your financial situation. Finances can be a huge stressor both personally and in relationships. In both cases, transparency and compassion are key. We’re in for a rough few years, so forming (and keeping) good habits is more important than ever.
If you can, try to set up an emergency fund to provide a buffer for unforseen circumstances. The rule of thumb is generally accepted to be 3 months’ worth of earnings, but the exact amount should depend on your circumstances and financial obligations. Do you rent, or do you have a mortgage? Do you have people to provide for? How long could you keep up your current lifestyle if you lost your job?
Strengthening your finances shouldn't require a complete overhaul of your life; a few easy tasks can set you on the right path, and, more importantly, help ease that nagging feeling that you are neglecting something important.
If you need financial guidance, it’s always a good idea to reach out to the professionals. A burden shared is a burden halved. It’s also important to look at your financial wellbeing holistically in line with your overall health; if your situation is keeping you awake at night, it’s likely having an impact in other areas than just your wallet.
Nick Stewart is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] https://www.nzherald.co.nz/business/reserve-bank-hikes-official-cash-rate-by-50-basis-points/S6762ORVMKBS6E3TGDPRA2N2SM/
[ii] https://www.rbnz.govt.nz/challenge/team-resources/monetary-policy-and-inflation
[iii] https://www.nzherald.co.nz/business/day-of-reckoning-coming-for-borrowers-of-160-billion-in-housing-loans-after-reserve-bank-hikes-ocr/426B3X734IFOYAO3QVVZJJOBAA/
[iv] https://www.rbnz.govt.nz/monetary-policy/monetary-policy-statement
[v] https://www.newsroom.co.nz/jury-out-on-budget-2022-help-for-first-home-buyers
[vi] https://www.trademe.co.nz/c/property/news/both-supply-and-demand-slow-down
[vii] https://www.rbnz.govt.nz/challenge/team-resources/monetary-policy-and-inflation
