Economists are debating the Reserve Bank's higher-than-expected OCR hike, but with household budgets already squeezed, what does the rise mean for ordinary Kiwis?
Yesterday's hike was unexpected, with most economists only tipping a 25 basis point.
The Reserve Bank uses the Official Cash Rate (OCR) to influence economic activity and predominantly to keep inflation at its target levels. Right now, the OCR is at its highest level since December 2008 — with rates rising since February last year.
The OCR is the wholesale rate at which banks can borrow money. With inflation at around 7%, the bank has been aggressively raising the rate in order to cool down economic activity.
For savers, they'll see better returns as interest rates rise, but borrowers will be forking out more in repayments. The general theory is when the OCR rises, it costs more to borrow money, encouraging people to save rather than spend.
ASB's chief economist Nick Tuffley told 1News that mortgage holders were likely near the end of end peak pressure: "We are probably near the end of peak pressure on mortgage rates, but there's potential for a little more to come through."
It's all people are talking about, but what is the OCR and how does it impact the lives of New Zealanders? (Source: 1News)
"Much of the borrowing that we have in the economy will be home loans. The interest rates on credit cards tend to be relatively stable. It's mainly your mortgage rates and deposit rates that'll be shifting around."
So if you have a mortgage, what does it mean for you?
"Fixing is cheaper than floating, but you give away a bit of flexibility.
"In this environment, we have this potential where the shorter-term rates give you a bit of security in the short term, but still leave you in a position where you can benefit if interest rates do start falling," Tuffley said.
But when will the OCR and interest rates begin returning to normal? Tuffley said inflation was "still going to be strong for quite a while".
"We think we are getting pretty close to the end of [OCR hikes], but what we need to recognise inflation is still going to be strong for quite a while. In our view, it's potentially going to be 2025 until inflation gets back in the Reserve Bank's target."
ANZ chief economist Sharon Zollner said the central bank faced a delicate juggle in choosing where to move rates. She estimates the OCR could be hiked from 5.25% to 5.50% next month and remain there for some time.
It's the 11th straight increase in the OCR. (Source: 1News)
"From where the Reserve Bank sits, the risks of doing too little and too much is simply not symmetric. If they do too much, they can fix it later by cutting rates, if they don't do enough, they could lose their inflation-targeting credibility."
The Reserve Bank's decisions are independent of politicians, but the Government's spending decisions will reflect the flagging economy.
"Obviously, these are the decisions of the Reserve Bank, they are independently made. At the Budget, we will have the reflection of Treasury's view around the economic trajectory," Finance Minister Grant Robertson said of budget day on May 18.
Meanwhile, National has been calling for more tax cuts in response to inflation and the cost of living crisis.
"If there was ever a time to release tax pressure and let people keep more of what they earn, it is now," finance spokesperson Nicola Willis said.
She said tax cuts would stack up, despite high inflation, as long as there was "more discipline from government spending".
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