What a change a few weeks can make. It was only a short time ago that some commentators were predicting that the official cash rate (OCR) wouldn’t start to rise until 2023 or even 2024, and the ‘consensus’ was for a rise in the second half of 2022. But that has all changed very rapidly, and now an OCR increase looks relatively likely for August 18th – i.e. only a few weeks from now. So what is going on and what does it mean for investors?
The key shift has been on the inflation front. With COVID driving supply chain problems and also increased spending/demand locally by NZ residents, stronger cost price pressures have started to emerge, and firms have obviously felt relatively comfortable that passing on these costs to consumers wouldn’t damage their market share much (if at all). Indeed, the latest CPI figures showed that inflation hit an annual pace of 3.3% in Q2, the highest for a decade and also above the Reserve Bank’s (RBNZ) target band of 1-3%. Perhaps of most concern was that price pressures have emerged in a number of sectors, not just those directly affected by COVID/supply chain issues.
In turn, to try and ‘get ahead of the curve’ on inflation, the RBNZ has already ended purchases of government bonds, and the next step in normalising monetary policy will be to raise the OCR – and probably sooner rather than later (especially if the labour market figures due on 4th August show another strong result for the unemployment rate). Mortgage rates have already been rising in recent weeks/months, and an OCR increase would exacerbate that trend.
Clearly, all mortgage borrowers need to prepare for these higher mortgage costs, and of course, the added pressure for investors comes in the form of...
