Interest rate rise expected to impact homeowners' mortgages for over a year

Some homeowners will be feeling a heavy strain as a result of interest rate hikes, with the Official Cash Rate lifting a further 50-basis points yesterday.

Infometrics chief forecaster Gareth Kiernan said the Reserve Bank's move showed a lack of confidence in having inflation under control, in contrast with Australia's Reserve Bank which opted for a smaller-than-expected hike earlier this week.

"They did make the statement [that] there's still broad-based pricing pressures right throughout the economy, they talked about global pricing pressures, they talked about the labour constraints and so there is still real concern there from the bank [that] there's a lot more work to do," Kiernan told Morning Report.

For the next six to nine months, there was expected to be ongoing upward pressure on fixed rates, he said.

Upward pressure was expected to continue on fixed rates for the next six to nine months, he said.

It would be a relatively slow process before interest rates came back down, he said.

"Inflation, even in the Reserve Bank's forecast, is not [expected] back within that 3 percent band until the second half of 2024."

It could help if the government cut its spending, but any cuts were unlikely to be quick enough to make a big difference, he said.

"It will help, but the real sort of onus now is on the Reserve Bank to keep on that tightening path to make sure that the productive capacity within the economy is not as stretched as it is now.

"It takes a long time for some of those government policy decisions to come through. We saw some very quick action at the height of the pandemic, but we're not going to see that sort of speed of change in government policy going forward."

Finance Minister Grant Robertson said it was the government's priority to reach surplus, expected in 2024-2025, but to do it any quicker would risk "significant cutbacks" in spending on areas like health, education and housing.

Loan Market director Bruce Patten told Morning Report the fear was that the Reserve Bank would go too hard on trying to get inflation under control and then overdo it.

"We just need to not go too high now, and I think you're seeing the Reserve Bank holding back from making predictions so that it gives them some wiggle room to suddenly go 'well nah, we don't need to go to 4.5, we might only go to 4.25'."

Some homeowners, or soon to be homeowners, were facing a year of pain due to the hikes, and matters were made worse by uncertainty and rising cost of living, Patten said.

"Although we have seen a rise in first-home buyers coming back into the market, but that was probably off the back of those rates that just dropped back a little bit in August 'cause once again expectation that things might have improved, they didn't and now they're hiking again," he said.

"So we're in for a little bit of pain over the next year, but I do see it returning to some normality in 2024."

His advice for homeowners, especially young people who had recently bought property in the past two years, was to hold out.

"We've got a bit of pain for another year, maybe 18 months, and then we'll see a little bit of relief."

Each person would need to tailor their response based on their circumstances, he said.

"If you've got good affordability and these interest rates aren't going to affect you and you've seen that people are making a lot of money ... you can afford to take the short term.

"If you can't afford it, you need to look at your budget, work out what you can afford, and fix for an appropriate term. So some of those people might want to fix a little longer like two or even a three-year or split their loans between one and three so that they offset it a little bit."