You wouldn’t be alone if you got a bit of a shock last week when Westpac announced it was putting some of its interest rates up.

After all, didn’t the OCR just go down?

Aren’t those interest rates heading in the wrong direction?

Let’s explore exactly what’s happening in the market and answer the question of why are interest rates going up in the lead-up to Christmas!

The OCR Just Went Down

In its last review of the year, the Reserve Bank announced that it was reducing the OCR by 25 basis points to 2.25%. This was a widely expected cut in the Reserve Bank’s quest to balance the economy.

However, in this November review, one (out of six) of the Monetary Policy Committee members voted to leave the cash rate unchanged. We can likely take this as a sign that we’ve reached the bottom of the current interest rate cycle – the OCR is unlikely to drop much lower.

After the cut was announced, we all paused and eagerly awaited news from the banks that their interest rates would be reduced again. We weren’t disappointed when all of the banks announced a reduction in their floating rates.

The talk in the market centred on providing relief to borrowers in the lead-up to the holiday season. But it was also noted there would be positive indicators that the economy was recovering by the next review on 18th February, so further cuts are unlikely.

So, how did we go from interest rate reductions at the end of November to an increase in rates just a couple of weeks later?

Why Are Interest Rates Going Up?

Westpac kicked things off by increasing its two to five-year terms by 30 basis points on Tuesday 9th December. Their two-year fix rose to 4.75%, and their five-year special rate moved to 5.29%. At the same time, they lowered their six-month rate to 4.69%.

ASB was not far behind, also increasing their long term rates. Soon, the other banks followed. But why?

There are a couple of reasons. Wholesale rates have crept up, so it is currently costing the banks more to borrow money. It was thought that wholesale rates rose in reaction to the Reserve Bank’s commentary.

“Before the latest OCR decision, wholesale markets had virtually priced in one more cut. So when the Reserve Bank indicated it thought another cut might not be needed, wholesale rates ticked up.” [source]

Is it an overreaction? Some economists think so. It has been a very quick reversal in position, going from interest rate cuts to increases in just two weeks. It can also feel confusing that interest rates are going up when the OCR just went down. But as we have mentioned in previous articles, there are many factors that determine what interest rates are set at, the OCR is just one component.

Where Are Rates Going Next?

It is hard to say definitively what will happen to interest rates in the short and long term. It has been reported that banks have some room to absorb wholesale rate increases. The main banks are currently operating at a net interest margin of 2.4% – 2.5%, roughly the same as what they were a year ago.

The fact that the main banks have all made moves to increase their longer-term rates is quite telling. But we will have to keep an eye on what might happen over the holiday period. If people are worried about rates rising again, they may restrict their spending over Christmas. That could force the Reserve Bank to make another cut in its February review. 

The key thing to note from all of this is that wholesale rates have stopped falling. Where things go from here is still not set in stone.

What Does It All Mean?

So, what does all of this mean for your average mortgage holder?

Well, the best advice we can give is to seek advice that is tailored to your personal situation. A mortgage advisor will be your best resource to navigate this period of the property market. They can help you build the best mortgage structure based on your current borrowing and future plans.

Economists have been saying for some time that we are nearing the bottom of this interest rate cycle. So, it could be worth considering longer-term mortgage fixes as the long term rates are unlikely to go any lower. In fact, the last week has shown they are likely to go higher.

In saying that, a blanket fix across your entire mortgage is not always the best option. Times are still uncertain and we don’t know what might happen next. It could be a better option to split your mortgage over a couple of different terms so you aren’t exposed to as much risk.

There is also the fact that banks are offering decent cash-back incentives to refinance. So that is another factor to consider if you are a new borrower or it is time to refix your current mortgage.

Basically, we think the best solution is to give us a call so that we can talk through your options. We can help you create a mortgage structure that will work with your budget and circumstances. Reach out to our team today for helpful, friendly and obligation-free advice.