RBNZ says full impact of interest-rate hikes still to be seen
NEW Zealand’s central bank said interest-rate increases are gradually lifting debt servicing costs for households and businesses, a process that it expects to continue for another year.
Around two-thirds of the mortgage debt that was fixed at very low rates during the early stage of the Covid-19 pandemic has now rolled over to higher borrowing costs, the Reserve Bank of New Zealand (RBNZ) said in its semi-annual Financial Stability Report on Wednesday (Nov 1) in Wellington. The effective mortgage rate, which is an average rate paid across the stock of all mortgage lending, is expected to reach 6.4 per cent by mid-2024 from its low of 2.9 per cent in late 2021, it said.
“Higher interest rates are placing an increased strain on indebted households’ budgets,” the bank said. “The average share of their disposable income going to interest payments is expected to rise from a low of 9 per cent in 2021 to around 18 per cent by the middle of 2024.”
The RBNZ has signalled it is done raising rates after rapidly lifting its benchmark to 5.5 per cent, but some economists think it will be forced to tighten further to get control of inflation. The central bank said in today’s report that the financial system is still adjusting to higher rates and “the full impact of previous interest-rate increases globally is still to be seen”.
The New Zealand dollar was little changed after the comments, trading at 58.23 US cents at 9.45 am in Wellington.
The RBNZ said the adjustment to higher rates is likely to be felt more strongly by certain cohorts of borrowers.
“An example is those who borrowed to purchase houses at high debt-to-income ratios in 2020 and 2021, when the housing market was at its peak and interest rates were below 3 per cent,” it said.
Measures of acute financial distress such as loan arrears have been steadily increasing over the past year but remain well below levels seen in the wake of the global financial crisis, it added, noting borrowers have so far been able to adapt to higher repayments by cutting discretionary spending, and have been supported by strong household income growth.
The RBNZ said it continues to develop a framework for imposing restrictions on high debt-to-income (DTI) mortgage lending, a tool which would complement the existing limits on low-deposit lending, or loan-to-value ratios (LVRs).
“Banks are developing reporting and management systems so that DTI restrictions could practically be implemented by April 2024,” it said. “We are currently assessing how a DTI tool could be calibrated alongside LVRs and intend to consult publicly on potential DTI settings in early 2024.” BLOOMBERG
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