Get ready to tighten the purse strings as economists say mortgage and other credit facilities could become costlier after the latest hike in Official Cash Rate (OCR). 

OCR is a financial tool that allows the Reserve Bank of New Zealand (RBNZ) to control the rate of interest consumers pay on services like loans. The central bank has raised the OCR to 5.25 per cent, increasing it by 50 basis points on April 5, 2023, to beat market expectations of a 25-point hike. 

The regulator hopes raising the rate would discourage consumers from spending, which will in turn help contain inflation that is hovering at 7.2 per cent, much higher than the one to three per cent the government considers acceptable.

Financial experts say the latest increase in OCR, the 11th successive hike since end of 2021 could push the economy towards recession. Trade policy economist and senior research fellow Rahul Sen told The Indian Weekender the central bank has indicated it is willing to go all the way to bring inflation back to its pre-Covid target of an average of two per cent over the medium term. 

“While the economy loses some long-term growth capacity due to recent cyclones, this move will push the NZ economy into further prolonged recession as investments and consumption expenditure will both be adversely affected, the expected value of future investments will decrease, and households are now pushed to the brink of cutting down spending on necessaries to pay up their mortgage rates,” he said.

A first home buyer in Auckland, who did not wish to be named, told The Indian Weekender his monthly loan repayment on a property he bought in late 2021 has already shot through the roof. 

“My mortgage payment has increased by $1300 a month in the last few months. When the time would come to refix the mortgage terms later this year, a further burden would fall on my family,” he says. 

Retail NZ, an advocacy group for retailers across the country, says the hike is likely to further hit consumers. Chief Executive Greg Harford says, “We are concerned that the latest hike in the OCR will further reduce consumer confidence. The retail sector is under enornous pressure and we'd like to see a bit of relief for consumers.” 

Controlling inflation appears to be a top priority driving the Reserve Bank’s approach towards monetary policy, says Dev Dhingra, CEO of Auckland-based mortgage advisory Fundmaster. 

“RBNZ would continue embarking upon its contractionary monetary policy for the next three to six months and consumers would probably see light at the end of the tunnel by end of 2023,” he says.

Controlling inflation is critical, says Rahul Sen, but he points out it is probably a good time for the government to perhaps even reconsider what level of inflation is acceptable under the ongoing market conditions.

“What is not clear is whether a two per cent future inflation target is even compatible in this post-Covid global environment. RBNZ wants to sacrifice short to medium-term growth to maintain price stability through these measures. Still, the goalpost for that stability may have already shifted a bit higher with cost-push pressures from supply chain issues last year,” he says.

Kiwibank chief economist Jarrod Kerr told RNZ the central bank runs the risk of over-tightening by increasing OCR. "I think we've seen enough in the economic numbers locally to see a significant slow down in economic growth over the next six months - we're seeing it in our credit card data, we saw it in the GDP numbers to end last year.”

He said the Reserve Bank seems more worried about inflation than some economists. "We're on a much weaker footing coming into this year, we think we've just seen enough locally and offshore there's a lot of turbulence in financial markets and there's likely to be recessions in countries like the United States, Europe and parts of Asia," he said.

The Reserve Bank of Australia also reviewed its OCR last week, but decided to hold it at the current rate despite the country battling rising inflation. It left the cash rate unchanged at 3.6 per cent to assess the impact of the 10 rate increases so far, but warned it would reconsider a hike in the future.