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Implications Of OCR

The implications of the official cash rate rise shouldn’t lead to an increase in mortgage interest rates, writes Kris Pedersen.

By: Kris Pedersen

15 June 2023

Just when it appeared that we may have hit the top of the official cash rate increases, a combination of surging migration numbers (the annual gain is sitting at circa 65,000 in comparison to losing 19,000 a year ago) and our finance minister spending more than he should (economist Cameron Bagrie pointed out that government spending as a percentage of GDP is increasing roughly 1 per cent a year since 2018 and this trend definitely continued at the budget) has meant that the cash rate has been increased by a further 25 basis points (0.25 per cent).

It was only a month or so ago that the general consensus was that the OCR either had already peaked or we would have a final rise of 25 basis points to hit an official cash rate of 5.50 per cent and that would be it. After the budget and net migration numbers, most economists changed tack and started to debate whether we would see a 25 or 50 basis point increase at the review on May 24. Several economists including Westpac’s suggested that we may still have further increases pushing the cash rate up to 6 per cent. It is worth noting that 12 months ago economists were predicting that now we would have an OCR of 3.5 per cent or 2 per cent under where we are, which shows how easy it is to be way off when estimating how hard it can be to rein inflation in once it is out of control.

No more rises

What is positive however is that the Reserve Bank believes enough has been done. The Reserve Bank has a monetary policy committee who votes to decide on the OCR and for the first ever time the decision was split. Two members voted for no increase at all; and no one voted for a 50 basis point increase.

The market had partially priced in a rise of 50 basis points and with there being an increase of 25 points, which resulted in some underlying swap rates dropping, we shouldn’t see any increases in fixed rates.

As a mortgage advisor, I had been a bit concerned that we may see the bank assessment or test rates (this is the rate the banks use in their borrowing calculations to assess how much someone can borrow) increase further. We’ve had a lot of customers who are only scraping past affordability checks at the moment and if the test rates had gone up any further a lot more borrowers would have been locked out of bank funding.

The Reserve Bank’s forecasting shows that they are not cutting rates until the last quarter of next year however some commentators think that the cuts are likely to start earlier than this; probably roughly in 12 months’ time.

This suggests a good general strategy for many (keep in mind individual situations may dictate otherwise) is to fix for 12-18 months. At the same time as mentioned above it is also worth remembering that forecasts can prove to be a long way off and so some may want to split rates over different terms to minimise risk.

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