Desperate to hold onto their lending share in a declining property market, banks have ignored Reserve Bank pressure to raise mortgage interest rates. But the standoff must end. Brokers reckon the first of the banks will blink next week. You can see the whites of their eyes.
Analysis: A notice in the front window of our local $2 Things store in Onehunga advises, regretfully, that they must raise their prices to $2.50 per item. $2 Things is no more; they’ve been forced to rebrand as “$2 Things Plus”.
Most everywhere you go, it’s the same. North Shore Drycleaners announced a 5 percent price increase last week. My favourite café is charging more for a scone and an espresso. Power prices are up. NZ Post has announced it’s increasing the price to mail a standard letter from $1.70 to $2.00.
After short-lived hopes that inflation had peaked around the world, it’s continued its rise in our key trading partners like Australia, the UK and the EU. And monthly indicators like the food price index provide a clear warning of where NZ’s quarterly CPI is going, in the wake of Cyclone Gabrielle.
READ MORE: * Small print shows impact of inflation isn't 7.2% but a massive 8.7% * Shock And Orr: Rates hikes are killing off housing affordability * What 2023 has in store for the NZ economy
That disaster widened the disparity of views - between those who foresaw accelerated inflation in food, cars and construction requiring the Reserve Bank to hold its nerve and those who believed ‘Recession Gabrielle’ now posed a greater threat than continued inflation.
So there were wails at the Reserve Bank’s decision to hike the official cash rate by half a percent yesterday. Nobody (or at least, no economist game to put their fast devaluing money where their mouth was) had picked such a big hike.
I was at least right when I wrote last month that New Zealand monetary policy is heavily influenced by the Fed. “As things stand, the Reserve Bank will consider it has little choice but to continue increasing the official cash rate until it achieves what it's explicitly threatened: a recession.”
But what nobody anticipated was that New Zealand Governor Adrian Orr would go even further than the Fed’s steely chair Jerome Powell. Powell hikes his rates to 5 percent? Orr says, ‘I’ll take that and raise it to 5.25 percent…'
That's higher than the Bank of England's 4.25 percent. That's higher than the Reserve Bank of Australia's 3.6 percent. That's high than the European Central Bank's 3.5 percent. Clearly, Orr wants to be known as the hawkiest hawk of the world's hawks.
Central bank official interest rates
Beneath it lies the question: what does the Reserve Bank monetary policy committee know, or think it knows, that nobody else does? And there’s a clue in the record of the committee’s meeting. “Recent banking stress in the US and Europe has resulted in lower wholesale interest rates and an increase in credit spreads,” it says. “Wholesale interest rates have fallen significantly since the February Statement, and this could put downward pressure on lending rates.”
And they have. Incredibly, the untold story of the past two months is that the banks, desperate to hold onto their lending share in a declining property market, have disregarded all the Reserve Bank’s pleas.
When the official cash rates increases, retail interest rates are meant to go up, and inflation is meant to fall as a result. But the reverse has been true. Banks have cut into their contentious profit margins to hold onto customers. Floating rates have risen but, according to interest.co.nz's average across banks, every fixed term rate has dropped since February.
"Crikey! Gordon Bennett! Even my eyes are watering at these numbers." – Janet Harris, Point Home Loans
There was a three-week war of mortgage rates specials, and every bank is now offering ‘cashback’ deals (typically 1 percent) when borrowers fix or refix, which disguise the true extent of the reduction in lending rates. Specials drop the rates below the carded rates.
"Right now, we've got everybody offering a two year rate of 6.39 percent," says Point Home Loans adviser Janet Harris. "A couple of months ago, it was 6.59 percent. So, it's gone down 20 points, while the OCR has gone up 50 points."
Little wonder, then, that Adrian Orr feels he has no choice but to force their hand. If whacking them with a heavy stick hasn’t worked, he’s gonna just whack them harder.
Ultimately, it will work. If banks are borrowing their money at an increasing OCR rate, there’s only so long than can keep lending it out at ever reducing rates.
For the past month or so, banks have been in a Mexican standoff – but someone must blink first.
ASB increased its servicing rate this week from 8.5 percent to 8.75 percent – that’s the hypothetical rate at which it tests borrowers' capacity to service their mortgage payments. Clearly it expects retail rates to rise soon.
Top 10 banks – average mortgage interest rates
Borrowers know it too. Harris tells me that as soon as borrowers get an alert from their bank that they are in the window to refix a loan, they're on the phone to her. No mucking around, they want to refix that very morning, before rates rise again.
She's got customers coming off 2.45 percent fixed rates this week. So, let's say they'd taken out a $1 million loan at the peak of the market a couple of years ago – how much more would they be paying?
Harris taps the numbers into her spreadsheet. "Crikey," she says. "Gordon Bennett! Even my eyes are watering at these numbers."
A customer refixing that $1 million loan would face a $1,005 a fortnight increase in payments, if they were quick enough to take today's special rate of 6.39 percent. No wonder they want to move fast, before rates rise further. "I think the window is closing," Harris says.
When will that happen? Brokers I've talked to reckon the first of the banks will blink next week. You can see the whites of their eyes.
