by Paul McBeth
The Reserve Bank's latest hike in its Official Cash Rate has got to be bad news for anyone with a floating mortgage.
Its move to raise the OCR yesterday, from 6 per cent to 6.5 per cent, was the fifth increase in the last six months. And it's not going to stop there, with Reserve Bank Governor Don Brash already signalling that the OCR could top seven per cent in the future.
While many mortgage lenders held off on rates increases after the last OCR rise mid April, they're likely to pass on the latest rise pretty smartly. Floating rate mortgages at the main trading banks have been sitting at 8.1 per cent, having risen from 6.5 per cent late last year in line with continued OCR hikes, and could now go up at least half a percentage point.
The OCR level influences the 90-day bank bill rate, itself a key influence on floating and short-term fixed mortgage rates. The RB is now foreshadowing the 90-day bank bill rate to tip 7.5 per cent over the next 12 months, which tallies with an OCR of 7.25 to 7.5 per cent.
Continued interest rate rises have already contributed to a flatter housing market in recent months and figures released yesterday by the Real Estate Institute showed that the number of sales in April was the third lowest for any month over the last decade. The Institute said that the drop in volume was most noticeable at the lower end of the market, with people holding back on buying their first home.
Along with the OCR increase yesterday came another Monetary Policy Statement by the RB, in which it came up with a robust outlook for GDP growth based on strong world demand and the stimulus linked with a weak Kiwi dollar. However, Macquarie Bank economists think the weak dollar won't be as expansionary as the Bank believes, "which suggests that growth and inflation in the second half of 2000 will be weaker than expected, which will than truncate the tightening cycle."
Meanwhile, Deutsche Bank says the RB's latest view on inflation (that it will stick in a narrow band between 1.6 per cent and 1.8 per cent over the next two years) is too optimistic and that it understates core inflation risks.
As for further OCR moves: "If the TWI remains at current levels at the time of the July 5 policy review, as appears increasingly likely, we expect the RB to hike the OCR by a further 25 basis points to 6.75 per cent," says Deutsche Bank.
"Regardless of the performance of the TWI, we expect the Bank to raise the OCR by a further 25 points on August 16."