Borrowing costs

Reserve Bank raises borrowing costs and warns more are to come

New Zealand’s central bank has outpaced almost all developed economies in raising rates despite delta vagaries, writes Justin Giovannetti in The Bulletin.

The cost of borrowing is rising for the first time in seven years. The Reserve Bank yesterday raised the official cash rate from a record high of 0.25% to 0.5%, a move widely expected by economists and one that will chill the economy for months to come. Whether this will have an impact on the housing market, as expected, remains to be seen. Like Things reports, banks announced within minutes that they were raising interest rates on home loans and savings accounts. Further Reserve Bank increases are expected in the coming years, which could push mortgage rates well above 5%.

What is the official exchange rate used for? It is the primary means by which the Reserve Bank controls the speed of the economy. In 2014 it was 3.5% when the central bank wanted people to save more and spend less. It’s been dropping since. Practically, it’s the rate charged on overnight borrowing between banks – there’s a lot of money circulating in the financial system to make it work. The banks then pass the costs on to you, dear consumers.

The hike comes at a difficult time. The Reserve Bank planned to announce the increase in August, but that was delayed by the Delta outbreak. Although a third of the country is in lockdown, Covid is spreading and the elimination strategy was abandoned earlier this week, the central bank said nothing really changed and it simply took over the August decision. Based on the government’s economic support last year, the central bank said it expected businesses to be shielded from the impact of ongoing restrictions. “Near-term growth will remain volatile and will depend on the speed and extent of the easing of public health restrictions,” the central bank’s monetary policy committee noted. Based on the massive question mark that is Covid-19, interest reports that the economic crystal ball is cloudy in the future.

There were no real cases of delay. As the New Zealand Herald (paywalled) explains, the Reserve Bank had to do it because everyone expected it. The central bank also revealed that it fears inflation could rise to 4% in the near term, especially with a tight labor market and an unhealthy rise in house prices. While higher inflation is a global phenomenon, New Zealand is ahead of almost all other developed economies with this decision. Most reported that they would not move for some time. The Australian central bank has just kept its rate at 0.1%. Economists said A news that they expect a rise next month also in New Zealand, followed by another in early 2022. A fourth rise could be on the cards thereafter. According to RNZ, mortgage brokers were expecting the upside and they think it will take a lot more to put off homebuyers.

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