Why the RBNZ hiked so much, and what it means

The RBNZ’s hike was a shock, but borrowers can blame the weather, an American bank, a Swiss bank and the Reserve Bank’s yet-to-be-confirmed fear of a pre-election lolly scramble. File photo: Lynn Grieveson / The Kākā

TL;DR: The Reserve Bank just threw a big cat among the Kererū in our political economy, and largely because of forces beyond its control, or even the control of the consumers that it wants to ‘cool their jets’.

Re-fixing borrowers can blame the weather, an American bank, a Swiss bank and the Reserve Bank’s yet-to-be-confirmed fear of a pre-election lolly scramble by the Government as early as May 18.

The Reserve Bank had to hike 50 basis points to 5.25% yesterday, twice as much as expected, because interest rates overseas that set the base for our mortgage rates had just quietly fallen as much as 70 basis points over the last month. That was threatening to drive mortgage rates down, which was the last thing the central bank wanted. This is why I spend a lot of time watching US Treasury bond yields. We are an open economy: open to global interest rates and open to the physical elements too.

Yesterday’s shock will feel just like the November 23 ‘cool your jets’ slap in the economy’s face, which had only just worn off in business and consumer confidence surveys after another frustratingly stop-start summer. Things had just appeared to be settling down again.

Some real estate agents and bank economists were even beginning to see some green shoots emerging from the centre of our housing market with bits tacked on (Auckland’s housing market), partly because of perceptions that mortgage rates had peaked and were about to fall. No more. The tumbleweeds will return to the open homes this weekend.

The Reserve Bank has just torched those green shoots in our real estate wonderland. It may also have singed the tips off the green shoots of Labour’s rebounding political popularity ahead of the election on October 14, and given it a last minute warning against a Budget-palooza of a pre-election lolly scramble on May 18.

Paying subscribers can see more detail and analysis below the paywall fold and hear more in the podcast above.

Why the RBNZ shocked everyone, and what happens next