Why are Mortgage Interest Rates rising?

Over the last couple of months fixed mortgage interest rates have risen at their fastest pace in 15 years, rates have increased by 2.0% or more! Last Thursday the Reserve Bank also raised the OCR to 0.50%. pushing up floating interest rates.

Why is this happening, in a word Inflation!

Where is all this inflation coming from?

We do seem to have a lot of extraordinary events happening at once that are affecting the entire global economy and in small open economy such as New Zealand a large portion of inflation is imported. Just look at the increased price of petrol!

Supply Chain Constraints: Many companies are having difficulty finding the raw materials necessary to manufacture their products. The rapid spread of Covid in 2020 prompted shutdowns of industries around the world and, while most of us were in lockdown, there was lower consumer demand and reduced industrial activity. Now that the world is opening up again customer demand has increased, including a lot of “catch up” spending this has led to chaos for the manufacturers and distributors of goods who cannot produce or supply as much as they did pre-pandemic.

Supply chain issues have been exacerbated for different reasons as well. Power shortages and floods in China have affected production, while in the U.K., Brexit has been a big factor around a shortage of truck drivers. The U.S. is also battling a shortage of truckers, as is Germany. Various countries including New Zealand are also experiencing large backlogs at their ports.

The pandemic has only served to highlight how interconnected, and how easily destabilized, global supply chains can be.

Labour shortages: Labour is in short supply here and overseas due to changing demographics like aging and retiring workers as well as border controls and immigration limits, the demand for better pay and flexible working arrangements. Labour shortages have delivered employees their best bargaining power in over four decades. The chances are very high that wage growth will increase business costs, in addition other labour related costs such as recruitment and training, will soar. This will place pressure on businesses to raise their selling prices.

Limited alternatives for consumers: The ability of consumers to purchase online from an alternative supplier when one’s preferred seller raises their prices has kept inflation in check. But now, when consumers go online to buy, the shipping costs are much higher and delivery times longer than before. Our ability to avoid price rises has been thwarted by shipping and supply chain disruptions.

As the global economic recovery continues to gather steam the situation will get worse before it gets better. Factories will eventually produce more; supply chains will sort themselves out and Labour shortages will be overcome; the question is how long will it take?

The answer to that question will dictate how long interest rates will continue to rise and how high they will go!