OCR rise 'wipes out' $350 cost-of-living bonus

Finance Minister Grant Robertson and RBNZ Governor Adrian Orr. Photo: RNZ
Finance Minister Grant Robertson and RBNZ Governor Adrian Orr. Photo: RNZ
The Government's $350 cost-of-living bonus announced last week in Budget 22 has been taken away with the Reserve Bank's cash rate rise, according to Kiwibank's chief economist.

"It's been evaporated in one move today," Jarrod Kerr said yesterday.

The Reserve Bank yesterday raised the official cash rate half a percent to a six-year high of 2 percent in a bid to reel in out-of-control inflation, which is at a 30-year high.

The central bank also signalled it will maintain its approach of " briskly" lifting the OCR.

Kerr said the announcement would throw a lot more heat on the fire of the cost-of-living crisis, not just with the decision today, but with the stated intentions of raising the official cash rate to 4 percent by the end of the year.

However, Kerr said the steep increase was unnecessary as people were already grappling with the cost of living. He said he feared for those with mortgages going forward.

Yesterday's announcement would have an effect on house prices, making prices drop further than expected.

"I'd previously forecast house prices to fall 10 percent this year," Kerr said.

"There's a good chance they'll fall closer to 15 percent on the back of this now. The Reserve Bank really does have their foot on the back of the housing market and wants to push it down to what it believes are more sustainable levels."

Interest rates were presently at around 5 or 6 percent, and he expected it to be at between 6 and 7 percent by the time those cash rate increases rises kick in. Anyone who hadn't fixed their mortgages would suffer, he said.

"There's about 15 percent of people on floating rates, so they get hit straight away and then over the next year 60 percent of New Zealand's mortgage book rolls over on to new rates and all those rates will be higher than what they were initially put on for.

"If you have a $700,000 loan and you've just seen your mortgage rate go up by 2 percent or more, that's an extra $15,000 per year. So we're talking significant increases in that mortgage."

The economist wasn't too concerned about the consequences of the central bank's move in the immediate term, but next year even the bank's processes of stressing testing potential mortgage customers would be put to the test, he said.

"It's going to squeeze the household budget a little bit more. We do have test rates. So we you come into bank and say 'I want a mortgage' we say 'well, we're going to test you at six-and-a-half to seven percent, so if you can handle that level than we'll give you money to that amount.

"And so people who are currently getting mortgages at 5 percent, are still below that, but that test rate will be tested itself in the next year. So that's when I'm more concerned that in a year's time we're going to wake up with people hitting the test rates."

The Reserve Bank's policies risked a recession, Kerr cautioned, and said we were entering precarious times.

"The risk of a recession certainly increases the more we tighten policy. It will be interesting where we wake up in a year's time. If the consumer has managed to hold on, if the labour market is still strong and wages are rising, then we could be in a situation where we have a soft landing. But we're only a few hick-ups away from a recession with the rate at which mortgage rates are rising."

Minister of Finance Grant Robertson acknowledged an increase in the Official Cash Rate would put more pressure on mortgage holders, but expressed confidence that the economy as a whole would hold up.

Local trusted journalism matters - now more than ever

As the Covid-19 pandemic brings the world into uncharted waters, Star Media journalists and photographers continue to report local stories that matter everyday - yours.

For more than 152 years our journalists have provided Cantabrians with local news that can be trusted. It’s more important now than ever to keep Cantabrians connected.

As our advertising has fallen during the pandemic, support from you our reader is crucial.

You can help us continue to provide local news you can trust simply by becoming a supporter.

Become a Supporter