Reserve Bank likely to increase official cash rate 'as slowly as it can' due to high levels of debt - Frances Sweetman

The Reserve Bank is likely to increase the official cash rate as slowly as it can and by less than it previously has due to high levels of household debt, an expert is predicting. 

On Wednesday, the Reserve Bank kept the OCR unchanged at 0.25 percent however it announced it will reduce the level of its current policy settings. From July 23, it will stop buying bonds under the Large Scale Asset Purchase (LSAP) programme, introduced in March 2020.

Effectively injecting cash into the economy to help reduce business and household borrowing costs, the programme is also known as 'money printing'.

Milford Asset Management portfolio manager Frances Sweetman told The AM Show on Thursday while the OCR has to be increased sooner rather than later, it's likely the increase will be fairly slow. 

"My view is that we could get an OCR increase not until next year because the RBNZ needs to raise interest rates and it wants to be able to raise interest rates consistently over a reasonably long period of time.

"In order to do that you need to get consistently high inflation and in order to keep inflation consistently high, people need to believe inflation will be consistently high. 

"So you need to really embed this expectation of higher prices and the easier way to do that is to let your economic boom run for longer." 

Sweetman said part of the problem for the Reserve Bank is reactions to increases will be swift because of high levels of debt. 

"If you think about the amount of debt you have in the system now, mortgage debt is now over $300 billion. Only six years ago it was $200 billion."

"So it means the debt you are paying is 50 percent higher and it means that unfortunately your income gets squeezed by 50 percent more when you're paying a higher interest rate."

Sweetman said because debt is high if interest rates increase too much it will cut back Kiwis' disposable income which will stop inflation and in turn force interest rate growth to stop.

"So the RBNZ is going to raise interest rates as slowly as it can and it is also going to raise them by a lot less than it has been able to in previous cycles because our response to higher interest rates will likely be a lot sharper because we've all just got a lot more debt."

Some banks have already started to increase mortgage rates. Ahead of the OCR announcement yesterday, ASB revealed rises across its fixed-term mortgage rates (and term deposit rates). 

Borrowers through ASB wanting to fix a rate for one or two years are now paying 2.55 percent and 2.95 percent respectively, the 5-year fixed-rate closing in on 4 percent.