Five Ways RBNZ’s Rate Hike Decisions Impact You

Thursday, 7 July 2022, 3:11 pm
Press Release: Kalkine

Central banks across the globe have been on an interest rate hike spree, with the Reserve Bank of New Zealand (RBNZ) being one of the frontrunners in the game. With inflation and cost of living pressures surging in the backdrop, interest rate hike is probably RBNZ's best weapon to bring normalcy back to the economy. However, interest rate hikes come at a cost, often borne by households, businesses, and the economy.

Rising interest rates change the way individuals spend and save money. As many individuals are already fighting high prices of goods and services, they would also be compelled to default on hefty mortgages and loan repayments. While this is the direct way in which interest rates impact households, there are other channels through which higher interest rates affect individuals.

The Reserve Bank has taken an aggressive approach to monetary policy tightening, raising interest rates to 2% by end of May from 0.25% in August 2021. This has led to a massive jump in interest servicing liability for loan holders. Here are certain ways the ongoing rise in interest rates can affect Kiwis.

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Inflation

Central banks across the globe raise interest rates in hopes of lowering inflation. The RBNZ has also taken monetary tightening steps to reduce the existing inflationary pressures felt in the country. Essentially, higher interest rates force many households to cut down on those expenditures that are not necessary.

At the same time, many buyers hold off expensive purchases that may require a loan. Buying a house or a car during a period of rising interest rates can be a bad decision. This, in turn, reduces investment in the economy. These factors contribute to a lower money supply and demand, which helps fight inflation.

Jobs

Higher interest rates can be a boon and a bane for different sectors of the economy. While they are necessary to fight inflation, they might also create challenges for the labour market. As interest rates rise, many businesses would incur higher costs for financing their operations.

At the same time, households trying to save money would reduce their consumption of goods and services. This can weigh heavily on the profits of businesses, which could be forced to slash their employee base. Thus, unemployment may rise if interest rates are increased in an economy.

Borrowing costs

The RBNZ raises the official cash rate (OCR) with the expectation that commercial banks will pass this rate hike to their customers. This is so because when OCR increases, banks' cost of fund also rises as inter-bank transactions happen at OCR.

As these commercial banks start to incur higher borrowing costs, they pass these on to consumers in the form of higher interest rates. Several rates charged to consumers move in tandem with the rising official cash rate. This includes credit card rates as well.

Consumer demand

Mortgage-holding individuals would be at the highest risk of losing out on their savings as they manage monthly repayments. Since the interest rate hikes have arrived at a time of soaring prices, there is an added burden on households to manage their finances.

Though no immediate spending cut is visible, consumers are expected to reduce their expenditure on discretionary items with the passing months. Additionally, many households have maintained high savings during the lockdown period, which are coming in handy in the current high inflation environment. However, sooner or later, these savings will dry out, and consumers will be forced to spend every penny cautiously.

Savings

Higher interest rates are always a good sign for savings account holders. As the rate offered on these accounts is linked to OCR, savings account rates tend to change with a lag whenever there is a change in OCR. The OCR is a benchmark rate for the savings account rates offered by commercial banks.

The returns on other checking accounts and certificates of deposits are also subject to change once the RBNZ raises interest rates. Thus, this is the perfect time to put more money into one's savings account.

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