Why did the Reserve Bank raise the OCR?
Over the past few months we’ve seen some encouraging signs. Fuel prices have eased, supply chains have improved and inflation has started moving in the right direction.
However, inflation is still sitting above the Reserve Bank’s target range. Even though some of the pressures that pushed prices higher have eased, it often takes months for those changes to flow through the wider economy.
The Reserve Bank believes inflation is moving in the right direction, but it isn’t prepared to declare victory just yet. This modest increase is designed to keep inflation under control now rather than risk inflation becoming more entrenched and requiring larger interest rate increases later.
In other words, this isn’t about trying to slow the economy – it’s about making sure the recovery can continue without inflation becoming a problem again.
The economy is improving - but not everywhere
New Zealand’s economy is continuing to recover, although the pace varies across different industries.
Agriculture and tourism remain relatively strong, while retail spending, construction and many households are still feeling the effects of higher living costs and interest rates.
The Reserve Bank expects growth to strengthen over the coming year as inflation eases and confidence gradually returns.
It’s a delicate balancing act. Raise interest rates too quickly and you risk slowing the recovery. Leave them too low for too long and inflation can become harder to control.
Should borrowers be worried?
For most homeowners, I don’t think this announcement changes a great deal.
Mortgage markets don’t wait for OCR announcements – they’re constantly adjusting based on where investors believe interest rates are heading. That’s why much of this week’s OCR increase had already been reflected in fixed mortgage rates before the Reserve Bank made its announcement.
In other words, borrowers shouldn’t expect mortgage rates to automatically rise by the same amount as the OCR. Banks have largely been pricing these expectations into fixed mortgage rates for some time.
While we could still see another one or two modest OCR increases over the next year, I don’t believe we’re heading back to the very high mortgage rates borrowers experienced a few years ago.
Instead, we’re gradually returning to what I’d describe as a more normal interest rate environment.
If you’re coming off a fixed rate over the next 6 -12 months, it’s still worth reviewing your options and making sure your loan structure suits your goals—but I wouldn’t be making decisions based purely on headlines.
What does this mean for property?
Investors are re-emerging after a slew of regulatory changes—from the Healthy Homes Standards to the removal of interest deductibility. While these measures slowed the market, recent interest rates reductions and more on the horizon have sparked renewed interest among investors. With the numbers improving, they’re watching closely, waiting for the right moment to re-enter.
My view
Overall, I think this is a positive development rather than something borrowers should be worried about.
In many ways, it’s a sign that the Reserve Bank believes the economy is strong enough to begin moving interest rates back towards more normal levels after several years of unusually low rates and elevated inflation.
While there will no doubt be bumps along the way, we’re starting to see many of the ingredients that support a healthier economy – lower inflation, improving confidence and a more stable interest rate environment.
As always, every person’s situation is different. Whether you’re buying your first home, reviewing your mortgage or building your investment portfolio, having a clear long-term strategy is far more important than reacting to a single OCR announcement.
Whether you’re coming up for a mortgage refix, thinking about investing or simply want a second opinion, we’d love to help. You can book a time that suits you using our online calendar below, or get in touch if you’d prefer to have a chat first.
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