Banks increase rates after OCR rise - so what's ahead?

ASB, BNZ, Westpac and Kiwibank have all now made adjustments to their floating interest rates, in the wake of this week's official cash rate increases.

The cash rate was increased by 25 basis points on Wednesday, taking it to 2.5 percent.

The increase had already been largely priced in to longer-term home loan rate fixes. Fixed term rates had already started to lift as early as the end of last year, even though the OCR was cut in November.

Two-year rates, for example, have lifted from a low of 4.5 percent to about 5.2 percent.

But the increase has flowed through to variable rates, and banks have increased those floating rates by the same margin.

ASB economists said they expected this to be the start of a "modest tightening cycle".

Home loan rates were being driven by more than the OCR.

"Fixed-term mortgages have been moving significantly between each OCR announcement and will continue to do so."

They said one-year fixed rates were now about 3 percentage points below the peaks of 2022 and 2023, even though they had lifted off their lows.

"Financial markets that influence mortgage rates price in what has happened but are also influenced by what is expected to happen. This flows through to mortgage rates. And now with the RBNZ beginning to return the OCR to more normal settings, it is showing up in the form of higher wholesale interest rates. Competition between banks is another influence on retail interest rates for both mortgages and savings."

There would be trade-offs to make for borrowers trying find the right term to choose, ASB said.

Short-term rates, out to terms of about six months, were likely to increase further, they said.

Longer terms would increase more moderately over 2026 if the economy and global backdrop moved in line with predictions. But they said borrowers taking a three-year term or longer could expect it to be a more expensive option than rolling shorter terms if rates only increased modestly over the year ahead, as was expected.

"Ultimately, it is a trade-off between the cost of the mortgage rate, interest rate certainty for a longer period, vs. the flexibility of the shorter terms and the potential for rates to start lifting over the years ahead. Mortgage rates could move lower, due to anything from RBNZ actions through to renewed threats to the economic outlook.

However, rates could also increase quicker than we currently expect if inflation does not remain contained in the way we are forecasting. Despite the challenging current economic conditions, it's important to note the ASB Economics team think that mortgage interest rates will settle in a much higher range than the historic lows struck during Covid-19."

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