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New Zealand’s Official Cash Rate Lifts to 3.5%

‍New Zealand’s central bank, the Reserve Bank of New Zealand (RBNZ), left its cash rate unchanged at 3.25% in October, as it had signalled. However, that has now changed. On November 28th, the RBNZ lifted its benchmark official cash rate (OCR) by 25 basis points to 3.5%. With inflation remaining above the mid-point of the bank’s target range of 1 to 3 percent for almost two years and no end in sight, markets have fully priced in a hike to 3.5% this year and a further 50 basis points next year. Even with weak global growth and renewed volatility in international financial markets, the RBNZ is likely to hike again before 2021 ends.

Why has the RBNZ changed its mind?

New Zealand’s economy has grown strongly since the RBNZ last raised its OCR in October 2017. The bank expects the economy to grow by 3.9% in the year to June 30 and 3.8% the year after. Inflation, meanwhile, has accelerated since September, mainly due to higher fuel prices. The bank now expects inflation to average 2.4% in the year to June. That’s well above the mid-point of its 1 to 3% target range. The RBNZ now expects its preferred measure of core inflation, the “trimmed mean”, to reach 2.9% by the end of the year, up from 2.8% in September. That’s the highest since March 2011. As a result, the bank now expects annual average wage growth to reach 3% by the end of the year, up from 2.5% in September.

What does this mean for mortgage holders?

Higher borrowing costs will be a dampener on the housing market in New Zealand, which is already struggling. One of the reasons why the RBNZ has decided to hike rates was to cool down the housing market, after the government introduced new restrictions on housing loans to curb the rate of housing price increases. With the new rates, mortgage payments will become more expensive, which will limit the number of people purchasing houses. That will also put a damper on the investment property market.

Recession is not on the horizon

Even as economic growth in New Zealand remains high, it is also expected to slow down in the coming years. The RBNZ also said that higher rates could help contain financial vulnerabilities. This could be due to the increasing level of debt in New Zealand, which has grown to a record level of just under $100 billion. The central bank expects interest rates to rise to 3.75% by the end of 2020, up from 3.5% currently. Interest rates have not been this high since 2003, when they were at 4%. With the RBNZ expecting inflation to remain above target, this means that the central bank will likely keep interest rates high for some time.

New Zealand dollar rises to a 13-month high

Given that the central bank expects annual average inflation to reach 2.9% by the end of the year, it was only a matter of time before the RBNZ raised its interest rates. And as expected, the RBNZ lifted its official cash rate by 25 basis points to 3.5%, as it has said it would do if the economic outlook remained as it was at its last meeting in September. However, the hike was lower than what many experts had expected. The RBNZ’s Governor Adrian Orr had hinted that a hike to 3.75% would be appropriate, while some economists had forecast the RBNZ would lift rates by 50 basis points. Given that the Reserve Bank lifted its benchmark rate to 3.5%, the NZD/USD will likely rise above the 0.70 level once again. The Kiwi has risen to a 13-month high against the US Dollar, up 0.6% to 73.82 US cents, as the RBNZ increased interest rates to 3.5%, higher than expected. The New Zealand dollar is likely to continue rising as the Federal Reserve begins to raise rates again in the US, which will make their currency more attractive relative to others.

Implications for housing market and real estate investors

Higher interest rates will likely make it more difficult for people living in New Zealand to purchase houses. This is because this could lead to a fall in house prices, especially in major cities like Auckland, where prices have reached historic highs. As interest rates rise, there will be a greater demand for rental properties, which will likely lead to an increase in real estate prices. If you are looking to buy a house or an investment property, now is a good time to start saving. A drop in house prices will also mean that investors can purchase properties at a lower price, which could lead to more opportunities for real estate deals.

Conclusion

New Zealand’s RBNZ made its first rate hike in more than two years, lifting its benchmark interest rate by 0.25 percentage points to 3.5%, as expected. The decision to hike rates was prompted by acceleration in inflation and a growing economy. However, the increase in the RBNZ’s benchmark interest rate would likely have a dampening effect on the country’s housing market and real estate sector, which had recently reported an increase in activity. The New Zealand dollar would likely continue rising amid higher economic growth in the country and the Federal Reserve increasing their rates in the US.

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