Interest rates rising

The cost of borrowing is going up:

The Monetary Policy Committee agreed to increase the Official Cash Rate (OCR) to 0.50 per cent. Consistent with their assessment at the time of the August Statement, it is appropriate to continue reducing the level of monetary stimulus so as to maintain low inflation and support maximum sustainable employment.

The level of global economic activity has continued to recover, supported by accommodative monetary and fiscal settings, and rising vaccination rates enabling a relaxation of mobility restrictions. While economic uncertainty remains elevated due to the prevalent impact of COVID-19, cost pressures are becoming more persistent and some central banks have started the process of reducing monetary policy stimulus. . .

This is a response to a steep increase in inflation:

Headline CPI inflation is expected to increase above 4 percent in the near term before returning towards the 2 percent midpoint over the medium term. The near-term rise in inflation is accentuated by higher oil prices, rising transport costs and the impact of supply shortfalls. These immediate relative price shocks risk leading to more generalised price rises. At this time, measures of core inflation and medium-term inflation expectations remain close to 2 percent.

The Committee noted that further removal of monetary policy stimulus is expected over time, with future moves contingent on the medium-term outlook for inflation and employment. . . 

The Taxpayers’ Union lays the blame for the increase at the government’s door:

“Today’s OCR hike – which will see households squeezed with hire mortgage payments, is a direct result of the Government’s reckless spending over the last 18 months. Even worse, with COVID’s economic shock now coming, it comes at the very worst time for households.”

“The Government needs to do all it can to focus on quality, not quantity, of spending. Its programme of money-printing and borrowing for political purposes has pumped up inflation to unacceptable levels and left future generations of taxpayers with a debt monster. Higher interest rates will increase the financial pain caused by that debt.”

It’s a risky move:

Today’s move by the RBNZ to raise the Official Cash Rate by 0.25 per cent to 0.5 per cent shows the bank has been forced to make the risky move despite two major New Zealand cities still being locked down, says National’s Shadow Treasurer Andrew Bayley.

“The Government’s failure to rollout the vaccine and prepare our Covid defences has resulted in the Reserve Bank having to make this decision in the middle of lockdown, which is incredibly risky for the economy.

“Obviously, the Reserve Bank has seen that the cost of living is rising too quickly, and its hand has been forced. This has been exacerbated by huge amounts of wasteful, untargeted spending from the Government on matters entirely unrelated to the Covid response.

“As a result of the Government’s lack of fiscal discipline and failure to prepare for another Covid outbreak, mortgage-holders and businesses are now set to face rising interest costs at a time they can least afford it.

“The Government should now take a cue from the Reserve Bank and rein in its wasteful spending and focus unrelentingly on its Covid response, and ensuring businesses survive the current extended lockdown.” . . 

The announcement has already led to an increase in interest rates:

It took just a few minutes for ANZ to announce it was increasing its floating and flexi rates by 0.15 percent. . . 

No doubt other banks will follow.

It’s a small increase on what was a historically low rate and is unlikely to bring much cheer to savers.

But it could bring woe to some borrowers.

A small increase on a big amount, which many who have bought into the overheated housing market have borrowed, could be more than some can afford.

The younger ones among them might not have seen interest rates in double digits and will have no memory of the 1980s when inflation and interest rates were raging.

Like most conventional sheep and beef farmers then, most of our income came in a couple of big chunks when we sold our lambs and wool. That was always several months after our major costs had to be paid so we survived on seasonal finance and at the peak we were paying around 26% for everything we bought for the farm and household.

Thanks to the “failed” policies of the 80s and 90s, such eyewatering interest rates should be consigned to history.

That won’t be of any comfort to home and business owners whose finances are already stretched and for whom even a very small increase in interest could stretch them too far.

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