Short-term home loan rates are likely to feel the most immediate impact of the Reserve Bank's move on Wednesday to keep the official cash rate on hold, but push up its forecast of increases.
By Susan Edmunds of RNZ
The bank kept the rate on hold at 2.25% but it was a split decision, with three of the committee members voting for an increase. Governor Anna Breman cast the deciding vote to leave the rate unchanged.
The committee said it now expects the official cash rate to lift more quickly than previously expected, to an eventual high of 3.28%.
ASB senior economist Chris Tennent-Brown said it was in line with what bank economists had expected.
OCR holds for now as Reserve Bank warns hikes are likely coming, watch on TVNZ+
"Inflation pressures have been very high and what's going to happen next is what influences the things that matter – mortgage rates, term deposit rates.
"I think the signal today is that inflation pressures are serious and rates will be moving off what we would regard as really low, an official cash rate of 2.25% is low.
"Even though they've held that cash rate, they're signalling rate increases are coming ... hopefully people are thinking about how that impacts them."
Wednesday's decision comes as financial markets price in a small but growing chance of an increase. (Source: BNZ Business Breakfast)
He said the meeting reinforced market pricing.
"We've already seen that some longer-term rates have been moving higher, back to what we'd regard as more normal levels.
"The shorter-term deposit rates, and the one- and two-year mortgage rates, those are the ones that are going to be impacted by what the Reserve Bank does over the coming meetings.
"Our message remains the same. We think the Reserve Bank's going to be lifting interest rates to fight that inflation battle, we think every meeting will be lie for rate hikes from now on."
For more financial and business news, go to BNZ Breakfast Business on TVNZ+
He said some people might need to ask a financial adviser or bank for guidance on how they managed increases.
"We think those shorter-term rates will start rising as the Reserve Bank raises the official cash rate to fight inflation."
People could consider a longer home loan fix, he said, or think about their strategy.
"It's a pretty clear signal that we're past the low point for interest rates and there's clearly some growth threats to the economy but inflation concerns are significant as well. That's what the Reserve Bank's focus is on."
Breman takes up the position amid concerns that rising mortgage rates could have an impact on the NZ economy. (Source: 1News)
BNZ chief economist Mike Jones said there was a clear intention from the Reserve Bank to get going with OCR hikes earlier and potentially to push the rate higher than previously envisaged.
"But market expectations were most of the way there already. Current rates already embed an expectation the OCR was likely to be lifted in July and end the year closer to 3%.
"The timing rejig does imply floating mortgage rates might tart to lift earlier, though. We've brought forward our forecast for when the OCR starts to rise to July.
"I think it will also support the more general upwards trend in wholesale interest rates that's been in play since late last year. That means fixed mortgage rates are likely to likewise remain on a gradual uptrend this year."
Reserve Bank 'playing catch-up'
Infometrics chief economist Brad Olsen said having a three/three split was a big event.
"It says quite clearly that there is quite a divide in terms of not necessarily what to do but when to do it. There seems to be a fairly strong view among the committee that probably something will have to change."
He said markets had already taken the view that rates would have to rise, which would limit the impact on home loans.
"The challenge here is that it looks like the Reserve Bank is playing catch-up which is never a great position to be in.
"There's a lot of uncertainty over pricing pressures and expectations and when the right time to move might be.
The changes will see its special fixed mortgage rates rise across terms from one to five years. (Source: 1News)
"But you do get the feeling looking at where all the pressure sin the economy have been in previous times, a weaker economic tone in recent years hasn't limited inflation like it was expected to – does seem to have suggested to some of the [external members of the committee] that we don't want to get behind the eight-ball.
"The sooner we move the sooner we've got options of maybe not needing to move up as much."
He said he would have been supportive of an increase to buy a bit more time to "get ahead of the game".
"Even before the Iran shock there was an expectation in the markets that you had to get the official cash rate back to 3%, if you now add in a whole 'nother level of inflationary pressure coming through ... if you think it's going to be passed through and we do, it does seem to be more of a question of how quickly you get [interest rates up] rather than whether or not you go."
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