They increased the OCR!
The Reserve Bank of today lifted the Official Cash Rate (OCR) which is the first increase in over 2-years and was not what most financial advisers and economists expected – 76.80% expected no charge including us.
After previously not agreeing, this time the Monetary Policy Committee all aligned in a unanimous consensus to lift the OCR by 0.25% to 2.50% and so today the increase was announced with a media release and conference.
Let’s unpack why the Reserve Bank has increased the OCR and look at what might happen for the rest of the year.
Why the Reserve Bank Increased the OCR
You might ask “why” they increased the OCR when the market seems so subdued.
This hike addresses persistent domestic inflation and acts as a strategic check against recent loosening in financial conditions. The committee said “some further reduction in monetary stimulus is likely to be required to return inflation to the 2% target mid-point”.
The only real explanation we have is that the Reserve Bank has always been criticized for acting too late with both increases and decreases. To help answer this we need to look at the comments in more detail:
“New Zealand’s economic recovery was underway before the Middle East conflict but lost momentum in the June quarter on the oil shock”
“Growth is expected to resume in the September quarter as these effects fade and confidence improves.”
The real concern is that inflation is still above the target mid-point of 2.00% and economic activity expected to strengthen which could push inflation higher again and especially in an Election year when the political parties have a history of throwing money around.
What Happens Next?
Most people knew that the Reserve Bank would life the OCR if either (a) the inflation was not contained under 3.00% (excluding the one-off oil shock) or (b) the economy really starts to pick up and therefore spending increases.
Inflation – we believed that the inflation was quite controlled now; however the Reserve Bank have noted that they think the lower fuel prices would support a recovery in spending.
Economy – they also pointed to business confidence and some activity indicators that showed increases in June, and the banks modelling currently predicts 0.6 percent growth in the September quarter. Previously we had rate cuts aimed at reviving the economy, and while some sectors are doing well, general household spending has not really increased and the Reserve Bank’s latest move today risks further denting the confidence and therefore spending.
As you can see there is a link between inflation and spending, but we would question if the Reserve Bank have got this right or not. Maybe they are seeing data that we are not all privy to, and that hopefully does point to a stronger economic recovery later in the year.
That would be welcomes by most Kiwis even if it does mean interest rates increase a bit.
Crucially, the committee have said that further OCR increases remain on the table at upcoming meetings, though the exact timing will stay strictly data-dependent. We think maybe September – watch this space (Kiwi Edition)
If you have a home loan then you might be wondering what this means for you.
Should we panic when they increase the OCR?
What About The Home Loan Interest Rates
Firstly, there is no need to panic when the OCR goes up, and you shouldn’t really panic if it goes down either. The OCR is increased if the Reserve Bank feels that spending is going to increase and put pressure on inflation. The opposite applies when the OCR is reduced. It normally means the economy is not doing well and people are not spending.
If you put this logic into your own life, what it generally will mean is if the OCR is increasing, then people are doing better, and that’s a good thing. Of course, it does mean that the interest rates might be pushed up a little bit, but if we’re all doing better financially, then that should be affordable too. Now, that’s not going to work for everybody as some people are in industries where their pay will not increase, and so the OCR will have a higher impact. But the opposite applies at times as well.
When you look at your home loan, the key thing is making sure that you have the best home loan, you have competitive interest rates, and you’re managing it effectively. The best thing you can do if you are unsure is to have a review with a mortgage adviser who can help you set up a decent mortgage strategy that can help you through times when interest rates increase and times when interest rates decrease, plus, of course, as your life changes as well.
You want to make sure you have the best home loan that offers the flexibility to work with whatever economic conditions are put in front of you – even when the Reserve Bank has increased the OCR!
