Reserve Bank Holds — But Rate Hikes Are Coming

The Reserve Bank kept the official cash rate (OCR) on hold at 2.25% on Wednesday, but the decision was far from clear-cut — and the message to homeowners was unmistakable: cheaper borrowing won't last much longer.

The committee voted three to three on whether to lift the rate, with Governor Anna Breman casting the deciding vote to hold. But alongside that decision came a revised forecast, with the bank now expecting the OCR to rise more quickly than previously signalled, eventually reaching a high of 3.28%.

What This Means for Mortgage Holders

For most people, the number that matters most isn't the OCR itself — it's what happens to mortgage and deposit rates as a result.

ASB senior economist Chris Tennent-Brown said the decision was broadly in line with what bank economists had expected, but the message was clear.

"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," he said.

Tennent-Brown noted that while some longer-term rates had already been creeping higher, it's the shorter end — one- and two-year mortgage rates — that would feel the pressure most directly as the Reserve Bank starts moving.

His advice for borrowers: start thinking now about how rising rates will affect you. That might mean locking in a longer fixed term, or seeking guidance from a bank or financial adviser. "It's a pretty clear signal that we're past the low point for interest rates."

'Every Meeting Is Live'

BNZ chief economist Mike Jones said market expectations had already priced in much of the shift, with markets anticipating an OCR lift in July and a rate closer to 3% by year's end.

"The timing rejig does imply floating mortgage rates might start to lift earlier, though," Jones said, adding that fixed mortgage rates were also likely to remain on a gradual upward trend through the year.

His team has brought forward their forecast for the first OCR increase to July.

A Divided Committee

Infometrics chief economist Brad Olsen said the three-three split on the committee was a significant moment in itself.

"It says quite clearly that there is quite a divide in terms of not necessarily what to do but when to do it," he said.

While markets had already anticipated rate rises — limiting the immediate impact on home loans — Olsen said the Reserve Bank appeared to be in catch-up mode, which he described as "never a great position to be in."

He would have preferred an increase at this meeting to get ahead of the curve, particularly given ongoing inflationary pressures. Even before recent global shocks added to the picture, markets had been expecting the OCR to return to around 3%.

"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," Olsen said.

The Bottom Line

Wednesday's decision was a hold, not a green light. The Reserve Bank has made it clear that rate increases are coming, likely soon, and potentially higher than previously expected. For anyone with a mortgage — especially those on short-term fixed or floating rates — now is a good time to review your situation.