Mortgage rates fall, but OCR still to rise

You might have been confused to see several banks reduce fixed mortgage rates last week, while at the same time newspaper columnists are saying the Reserve Bank is still a shoo-in to lift the official cash rate by 50 basis points on Wednesday. At face value, the two appear not to coincide, but if you dig a little deeper then you will see the two are in fact intertwined.

Although the general trend for mortgage rates is still one of creeping a little higher, it is becoming clear that the top will not be as high as the Reserve Bank and many other economists initially thought.

I have been strongly saying for a while now that the Reserve Bank’s intended track for interest rates was too aggressive, and global and domestic recessionary concerns and asset price wobbles would prevent rates getting too high. It is some of these concerns that have cracked open a window in global wholesale interest rates and enabled our banks to pass on some temporary mortgage rate reprieve to homeowners. But make no mistake, this reprieve is not yet a downward slide in mortgage rates, and the Reserve Bank won’t yet have seen enough domestically to be reassured that inflation is under control and that demand has sufficiently cooled.

So another OCR hike is likely to be what we see on Wednesday from the Reserve Bank, which would take the OCR from 2% to 2.5%.

Of more interest to me on Wednesday won’t be the hike itself, rather it will be the wording of the few accompanying few paragraphs in the media release. The Bank will need to strike an interesting balance between playing it tough on inflation, while acknowledging that slowing consumer and business confidence may influence how aggressive the Bank plays things later in the year.

From my perspective, the 4% OCR in 2023 signalled by the Reserve Bank at its last meeting is off the table, even if the Bank doesn’t say as much. The Bank is unlikely to get the OCR up that high as much as it has said it wants to – the speed wobbles we are currently seeing in the economy risk becoming real wobbles long before that happens. Realistically the Bank knows this and its aggression has simply been trying to shock people into pulling their heads into line and to stop building expectations of inflation into contracts they are signing now and those that span out over the next couple of years.

We already have a lot of monetary tightening in the system and that will continue to slow demand over the next couple of months, particularly as many households refix mortgages at higher interest rates. The trick for the Bank is to have things slow just enough to bring demand and supply into balance, without accidently sparking something more major by being too aggressive.

For more on my reaction to the Reserve Bank’s last OCR review, please see this article in the ODT. In the meantime, I am eagerly awaiting the next review on Wednesday.