Interest rates: What’s happening with them? What affects them?

Interest rates - what affects them?

Written by Money Empire

August 1, 2023

Mortgage interest rates are in the news when they’re low – and even more so when they’re high. However, what feels high – at the moment – might not be as dramatic as you think.

Yes, it does feel as though rates have recently moved significantly from one extreme to another and the return of any kind of settled, ‘in between’ period feels a long way off, but such highs and lows have always been part and parcel of borrowing. So, this seems a good time to take a quick look at some history over the years, providing a bit of context – and hopefully, signalling reasons for optimism.

How has this current situation come about? The current state of mortgage interest rates explained

Most of us understand that the Reserve Bank of New Zealand (RBNZ) has recently been forced to raise the official cash rate (OCR) in order to cool the economy – post the initial Covid19 crisis and its accompanying lockdowns.

During that very unusual period, which began around March 2020, RBNZ dropped rates in an attempt to protect the economy from unprecedented stresses and – ironically – to generate inflation, but without any intention of rocking the boat to an alarming extent.

Not surprisingly then, it’s a bit tricky to get our heads around the current increase in the cost of living – to its highest point in over 30 years. It set in as the market roared back, in 2021 – and RBNZ’s attempt to arrest the rise has seen the OCR rising by 5 percentage points in a seemingly relentless series of 12 consecutive increases since October 2021. There’s no doubt that this is putting pressure on households – and especially on homeowners who bought property for sky-high figures and fixed their mortgages at unusually low interest rates between late 2020 and 2021. However, it is important to note that during this period, banks carefully stress- tested applicants’ incomes -adding at least 2.5% to 3% to the rates which prevailed at the time.

Is this all really anything new? Navigating mortgage interest rates

It does seem that most generations will get at least one interest rate wake-up call somewhere along the way during their home-owning journeys. The extent of these shocks can vary, so it would seem that being philosophical – as well as fiscally careful – is key to weathering such storms.

Standout periods include the 1980s, which played out dramatically amidst an environment of soaring inflation. Current consumer price rises might seem excessive – especially to those aged under 50, but in 1987 the annual rate of inflation was an eye-watering 15.7% – a figure that helps add vital perspective to current conditions.

Why was that ‘crash’ so dramatic? Mortgage interest rates through the years

During a year still remembered for a shock global stock market collapse which caused international fallout, that in turn severely affected New Zealand’s economy, the average kiwi first-home buyer in 1987 was forking out half of his or her annual income to lenders.

That’s basically because the gravely concerning international situation saw the RBNZ raising rates to unprecedented levels to try and keep the country afloat, meaning some mortgage holders were servicing an almost unbelievable 20% interest on their loans.

Farmers – in particular, suffered as those buying into the industry or improving their properties were struck with the double whammy of soaring mortgage interest rates, coupled with a historically high exchange rate. Unfortunately – as a result, many went to the wall.

What happened next? RBNZ’s efforts to tackle inflation and its impact on mortgage rates

By 1992, inflation had been broadly tamed and has largely continued on a downward trajectory ever since, keeping mortgage rates at roughly around the 7% level – on average.

Have there been any other shocks?

The 2008 global financial crisis definitely dealt our Kiwi economy a notable shudder. An accompanying economic spike caused by swiftly rising price rises in New Zealand took us back to the highest level of inflation since 1990 – with rates reaching a high of 5.3 percent.

What’s happening now? The impact of global crises on mortgage interest rates

RBNZ aims to keep inflation between 2 and 3%, so despite the recent improvement, their challenge is far from over. Even with an annual inflation rate of 6% to the end of June, announced by Stats NZ on July 19, setting the scene for optimism, rising food prices are still causing concern.

So, while the current post-Covid inflation crisis does appear to be easing, after a pretty exhausting couple of years, most economists are still wary when it comes to predicting if and when we’ll be truly out of the woods – or speculating too much about what lies ahead on the mortgage interest-rate front.

In conclusion, navigating the ever-changing landscape of interest rates and financial markets requires knowledge, foresight, and expert guidance. At Money Empire, we are committed to empowering you to make well-informed decisions about your mortgage and financial future. Our experienced advisers will be by your side, providing valuable insights into the historical context and the current market situation, ensuring you are equipped with the tools you need to prosper in any economic environment. Don’t let uncertainty hold you back, get in touch with Money Empire today.

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