This month saw the first concerted interest rate hike for ten years - the last signalled programme such as this was in March 2004 when the Reserve Bank started a three year programme of raising the Official Cash Rate (OCR) from 5.0% to 8.25%.
We cannot accurately predict how high the OCR and mortgage rates will go as there are many factors which can change the situation and our assumptions. However, Harbour Asset Management has undertaken analysis work using the Reserve Bank predictions, swap rates and current longer term fixed rates and this indicates that floating mortgage rates could rise well into the 7% category and even possibly reach 8% by 2017. For many home owners, this is a mortgage rate increase in excess of 50% so some pain will be likely if the Reserve Bank feels it is necessary to raise the OCR to as high as 5% to dampen inflation.
There is no doubt that interest rates will rise - it is just a matter of how high and how soon. Harbour Asset Management believes we will see a steady rise in mortgage rates this year with borrowers still able to find fixed term rates at relatively palatable levels. Given the strength of the economy and high consumer confidence, it does not seem likely that consumption across the broader economy will fall sharply in 2014. A dampening of inflation and a slowing of consumer expenditure could lag any Reserve Bank move by 6 months. This might result in the Reserve Bank giving us a few quick sharp interest rate rises (ANZ predicts three rises by mid 2014) to jolt the economy out of its current economic euphoria and then in 2015, the Reserve Bank might sit back and watch to see how everyone reacts and increase the OCR more modestly.