The Reserve Bank of New Zealand has forecast that the country will enter a recession in 2023, raising its official cash rate by an unprecedented 75 basis points to 4.25%.
The cash rate hike announced on Wednesday, the largest in central bank history, will try to keep New Zealand’s 7.2% inflation rate under control.
“Inflation is not on your side,” Reserve Bank Governor Adrian Orr said at a press conference after the announcement. “To get inflation out of the country, we need to lower spending levels.”
The latest rate hike raises concerns among New Zealand’s highly leveraged homeowners. Many of them will soon be in need of refinancing their mortgages at much higher interest rates than they were previously paying, with no short-term relief in sight.
The bank, which had previously forecast cash rates to peak at 4%, expects interest rates to continue rising, peaking at 5.5% next year, then holding that level for about 15 months before declining. doing.
Banks raised cash rates for the ninth time in a row.
The official cash rate is the rate at which central banks lend money to commercial banks, so it can affect lending rates for these banks, including interest rates paid on mortgages.
The New Zealand housing market is unusually vulnerable to these fluctuations due to its highly expensive housing market, high levels of debt and fixed short-term mortgage rates. The market has long struggled with affordability. According to the IMF’s October 2022 Global Financial Stability Report, New Zealand’s price-to-income ratio is one of the highest in the world.
Also, countries usually fix interest rates on short-term mortgages for 1-3 years. About half of New Zealand mortgages will need to be refinanced in the next year, and many of these borrowers may have last modified their mortgages at the lowest interest rates in 2019. mortgage repayment.
In its financial statements, the Reserve Bank also predicted a recession in 2023 and continuing through 2024.
Orr said the bank was forecasting a “shallow recession”, with GDP expected to decline by about 0.5 percentage points in the second quarter of 2023, followed by a further decline of about 0.3 percentage points.
National finance spokesman Nicola Willis said in a statement that the outlook for New Zealand’s economy was grim.
“Ominously, the Reserve Bank is not only predicting a year-long recession, but also believes that inflation has yet to peak and will be even higher early next year than it is today.”
“This is all the more worrisome that more groups of kiwis are staying up late worrying about rising mortgage payments,” she said.
The Reserve Bank of New Zealand is generally more active in fighting inflation than the Reserve Bank of Australia. It also considered a 100 basis point rise, according to the Reserve Bank’s financial statements.
At the beginning of November, the Reserve Bank of Australia increased its cash rate by 25 basis points to 2.85%, the highest level since early May 2013.