For the fifth time in a row, we’ve seen a 50 basis point hike from the RBNZ. What does this mean for you?
Well, firstly – no one has the power to accurately predict the future, but most were fairly confident this was going to happen. The OCR has already had 4 hikes of 50bp in a row and inflation is still rampant, so it’s not shocking that the RNBZ has gone five for five.
The good news is that it didn’t go to 75bp, though it sounds like it was a close thing.[i]
The bad news is that those with debts won’t see any interest rate relief for a while yet.
There’s an inverse relationship between the OCR and inflation – they cannot sustain being high simultaneously long term. That’s why we’re seeing the OCR go up (and up… and up…) because the RBNZ is trying to drive inflation down.
How this plays out for Joe Schmoe in the real world, however, involves a lot of pain as one tries to outstrip the other. Inflation in NZ has run rampant for a while now, sitting (un)comfortably at 7.3% with the Consumer Price Index (CPI) set to be updated on October 18.[ii]
Stress testing by banks has also risen, with ASB testing at 8.15% and ANZ at 7.95%. This means in order for someone (like an aspiring home-owner) to take on debt with these banks, they need to prove they could service their mortgage at these increased rates - even if actual mortgage rates are lower at this time.[iii]
This is likely happening for two main reasons; firstly, the banks have inflation in mind. Secondly, the tighter restrictions as a result of the CCCFA mean banks are being very cautious with their lending. Having high stress test rates is part of this, as it helps prove you are a fiscally responsible and could handle further rate rises (i.e., you’re not taking on debt beyond your control).
Essentially, the idea of the OCR going up to drive inflation down is like playing fiscal chicken and holding strong until the other player falls back. In the meantime, bills go up, people spend less, and hopefully we eventually see things like groceries becoming less expensive to incentivise spending again.
Since this is our fifth 50bp hike – here’s five things to keep in mind in the current climate.
1.) Form good fiscal habits now.
We can’t accurately predict when inflation will peak, so we need to behave as if we will be in the proverbial for a while yet. If you don’t already, make time to sit down and regularly assess your incomings, outgoings, and where you can save a buck or two – can you change your phone provider for a cheaper bill, or cancel a streaming service you don’t use as much?
2.) Stay focused on what you can control.
You can’t change what’s happening out in the world right now. What you do have control over is your own actions, including adhering to or refining your financial plan… or creating a robust one, if you’ve been winging it thus far.
3.) Take precautions where you can.
This will look different to everyone, but it’s always a good idea to protect what you value in the anticipation of a rainy day. Do you have an up-to-date, comprehensive insurance plan to make sure you can still cover bills if something goes awry and you fall on hard times? Or to provide for your whānau, should the worst happen?
4.) Talk to a professional if you have concerns.
If you’re concerned about your investments, insurance, or KiwiSaver funds, the best way to alleviate your fears is often to talk to the professionals. They can help put your mind at ease – or if your goals or situation have changed, they can advise you how to best proceed without compromising your financial future.
5.) This, too, shall pass.
Every winter turns to spring (even if it’s been a chilly start – literally and figuratively). It’s important to think long term and keep planning for the future, without getting too caught up on today’s bad news. Putting your head in the sand and ignoring everything isn’t a good plan, but neither is letting your emotions guide you during a bumpy time. High inflation and high rates can’t last forever.
In the grand scheme of things, our current situation is temporary. History shows us that markets come back up, and inflation eventually goes back down... but in the meantime, the only way out is through.
With a strong, evidence-based financial plan, you can account for the ups and downs (and what your best course of action in these times is). If you’re looking to sort your financial road map, sitting down with a trusted financial adviser is a great place to start.
Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) 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 show, 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/unusually-explicit-reserve-bank-tone-points-to-higher-mortgage-rates/VVSN66DBTZXKJ4K7WGSEL6YMNY/
[ii] https://www.stats.govt.nz/indicators/consumers-price-index-cpi/
[iii] https://www.nzherald.co.nz/business/banks-keep-hiking-test-mortgage-rates-and-limiting-risky-lending/KUZV5F3UM64TFB4MB65B5LDQAY/
