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The Bank And The Bazooka

Borrowers need to be careful in the trenches as the inflation war rages on, writes Kris Pedersen.

By: Kris Pedersen

31 January 2023

By the time you read this we will know if the Reserve Bank has been correct in picking a 32-year inflation high of 7.5 per cent for the December quarter. If this is the case, or close to it, expect the RBNZ to bring out the bazooka and hit the market with a 75-basis-point (O.75 per cent) increase at February’s next official cash rate review.

And this won’t be the end of things: in all likelihood if it happens they will follow up with a further 50-point increase in April. If this is how things play out we will have experienced a whopping 525-point increase off admittedly the lowest ever cash rate base over a 20-month period.

There is debate, however, over whether inflation will be this high. Most other economists are predicting it will be lower, with ranges estimated between 6.9 and 7.4 per cent. If it was to come in at the lower end of this range, then talk is likely to change to us coming towards the top of the interest rate cycle and predictions will start around when we may see interest rate reductions.

MORTGAGE CURVE

Also, at the time of writing (January 24) we have just seen the mortgage rate curve go negative at ASB with longer rates being cheaper than short-term rates (the one-year is 6.84 per cent with the five-year rate at 6.49 per cent).

This is where borrowers need to be careful.

It can be easy in a time like we are experiencing to take the cheapest rate on offer, but as happened after the global financial crisis this is where if rates come down then borrowers are locked in as there can suddenly be substantial break fees to get out of a mortgage if inflation is brought under control and rates start to drop.

There is expectation that our Reserve Bank and other central banks overseas will cut the cash rate by the end of this year. This signals that although they may be a lot higher than what borrowers have experienced over the last few years, fixing either for a one-year or two-year rate may provide some short to midterm certainty while not locking in too long that borrowers miss the lower rates once inflation subsides.

CHANGE OF PM

It is important to note that 2023 is likely, as we have experienced in the last few years, to be a bumpy ride.

We still don’t know how the Russia/Ukraine situation will play out and domestically we need to see if the change of prime minister encourages fiscal discipline inside Labour, with political polls showing the cost of living is a major concern or, alternatively, if some electoral bribes are thrown out in an attempt to affect how we vote this October.

If it is the latter rates could stay higher for longer.

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