The window of record-low interest rates is diminishing rapidly for borrowers, with ANZ, ASB and Westpac among the banks to lift their retail mortgage rates on Monday.
Across the five main banks, standard one-year fixed mortgage rates start from 3.65 percent, two-year from 4.35 percent, and three-year from 4.69 percent. Five-year rates start from 5.19 percent, the cheapest floating rate from 4 percent.
Ahead of Wednesday's Official Cash Rate (OCR) announcement, ASB chief economist Nick Tuffley told Newshub financial markets have already priced in an OCR of around 3 percent by mid-2023.
After consumer prices jumped 4.9 percent over the year to September, a survey of business inflation expectations released by the Reserve Bank on November 18 shows expectations have "risen very sharply".
Annual consumer price inflation is expected to reach 3.7 percent in one year and 2.96 percent in two years, above the Reserve Bank 2 percent target midpoint, survey results showed.
Following the results, wholesale interest rates went up, causing a sharp lift in retail mortgage rates and savings rates.
"We've seen wholesale interest rates rise very sharply and that's feeding through into all the term lending rates," ASB chief economist Nick Tuffley said.
While ASB forecasts show a 25 basis point rise to the OCR to 0.75 percent on Wednesday, markets have effectively priced in almost a 50/50 chance of a 50 basis point increase, Tuffley said.
"If we see a 50 [basis point rise], it's likely wholesale rates will go up a bit further," Tuffley said.
One of the important indicators on Wednesday will be whether the Reserve Bank lifts its OCR forecast. Based purely on targets the Reserve Bank is needing to hit over the medium term, everything is pointing to a need to keep lifting the OCR. But the COVID-19 Delta outbreak still creates uncertainty and risk, particularly as restrictions ease over summer.
"If it's just a 25 basis point increase and there are key signs it's going to keep lifting rapidly, there may be a slight fall back in interest rates, but it's likely to keep interest rates quite high," Tuffley added.
Given the amount of debt mortgage borrowers have taken on, and sensitivities to rising interest rates within the housing market, ANZ economist Finn Robinson expects interest rate rises to be more effective than they've been in the past.
The bank is forecasting the OCR to rise to around 2 percent by December 2022, lifting by 25 basis points on Wednesday.
"We've already seen some of the biggest mortgage rate rises in recent decades over the last couple of weeks... that's really going to bite people's wallets and slow the economy down to a more sustainable pace," Robinson said.
Having fixed most of his mortgage at 2.25 percent for one year in March 2021, a homeowner told Newshub he's now kicking himself for locking in the cheapest rate without considering whether interest rates would go up.
At the time, he had the option to fix at 2.99 percent for five years, he said. On Monday, the one-year fixed rate offered by his bank is already two percentage points higher, at 4.25 percent. The five-year fixed rate is 5.85 percent.
"We got caught... the cheapest rate is not always best," he said.
Using the rule-of-thumb that on a $500,000 mortgage, each 1 percentage point increase costs about $5000 per year ($100 per week), he expects his repayments to go up by at least $192 per week when his mortgage rolls over next year.
Followng the onset of COVID-19, the Reserve Bank dropped the Official Rate Rate to a record-low 0.25 percent in March 2020. After 19 months, in October 2021, the Reserve Bank started to remove the emergency cash rate setting, raising the OCR by 25 basis points to 0.50 percent.
The Official Cash Rate will be reviewed on Wednesday, as part of a Reserve Bank Monetary Policy Statement.
