2023 closed with the promise of interest rate relief hanging in the air.

The inflation numbers were going in the right direction and all the predictions were for the OCR to drop at some point in 2024, and interest rates with it.

Now, we sit on the eve of the first OCR decision of the year and we are being warned it could go up.

How did we get here and when will we see the relief we have been promised?

Let’s explore.

Why So Volatile?

The Reserve Bank has been very clear on its stance that they do not expect the OCR to drop until late 2025. Up until a few weeks ago, most economists were predicting otherwise. Some had forecasted as many as four rate cuts this year.

Then suddenly, ANZ is warning that the OCR could actually go up in the first review of 2024. While it is currently the only bank speaking of this potential, it is an about-face from the predictions we were hearing last year.

So, what has caused this change in opinion?

The Reserve Bank has indicated that the main reason that the OCR remains high (and could go higher still) is due to stubbornly resistant inflation. Despite some promising signs like weaker GDP data appearing and wholesale swap rates dropping at the end of 2023, the market has since reversed.

Because of that, predictions have changed.

Will The OCR Go Up Or Down?

The Reserve Bank is due to make an announcement on the OCR this week. ANZ is standing firm on the possibility that it could increase 25 basis points and rise to 5.75%. All other major banks are predicting that it will remain constant at 5.5%, the level it has sat at since May 2023. However, they have not ruled out the possibility of an increase.

What they are all in agreeance on is that the OCR is not ready to go down… yet.

This volatility is very common in a market that is about to change. There are signs that the Reserve Bank’s efforts are working. Inflation is tracking down, albeit slower than they would hope. Employment rates are also easing, but again, slower than the Reserve Bank would like.

The economy is shrinking, but migration rates remain high bringing much needed skills to NZ and making it easier for businesses to hire the talent they need. Great for the businesses, but not so great for the employment figures that impact the Reserve Bank’s decisions!

All of this indicates that things are heading in the right direction, but are they heading there fast enough to maintain the OCR at 5.5%? Only the Reserve Bank can decide that.

What Does It Mean For New Zealanders?

Everyone is starting to feel the pinch on their household budget. Rising interest rates and living costs are putting pressure on lots of NZ households. Unfortunately, that pain is not over yet and may even get worse before it gets better.

There is always a lag in changes to monetary policy and the resulting effects on everyday households. The OCR has been high for a long time now. Back in September 2021, the average interest rate on mortgage debt was 2.8%. Right now, it is sitting at 5.9% and is expected to rise to 6.3% in the next 6 months as homeowners continue to roll off their fixed rates set two and three years ago. Relief from these rates is still a way off.

While current monetary policy is working, it is happening much slower than expected. For that reason, the Reserve Bank is hesitant to make changes too soon and undo the work that has been done so far. They do not want to cut the OCR now only to have to raise it much higher in the future because of cutting too soon.

The best thing to do right now is to sit tight and try to weather the storm. Change is coming, we just don’t know exactly when it will be.

What’s The Plan?

In this particularly volatile period of finances, we urge you not to rush into any decisions. Change is coming, so making sensible decisions now is paramount.

Longer term interest rates may look attractive now, but you do not want to be fixed at a high rate for multiple years if change is on the horizon. While we can’t predict exactly when interest rate cuts will happen, we know they are coming. In the meantime, we can offer our best guidance based on a number of factors.

So, whether your interest rates are due to come up for renewal or you are considering buying or selling, now is definitely a time when you want expert financial advice.

Chat with a trusted mortgage advisor, like the team here at Mortgage Suite so that you can make the best move for your circumstances in the current volatile market.