In our recent discussion, Mike and James explore whether war could push interest rates higher and what that might mean for homeowners.
Below we break down how global conflict, inflation shocks, and wholesale money markets can influence what happens to interest rates and your mortgage.
Will War Push Interest Rates Higher? Not Necessarily
A common assumption during global conflict is that inflation will spike and central banks will respond by lifting interest rates. However, the situation may not be that straightforward.
Rising oil prices are often the first concern. If oil prices surge – particularly if key shipping routes like the Strait of Hormuz are disrupted – transport and shipping costs rise, which pushes the price of goods higher. This creates what economists call an inflation shock.
At first glance, higher inflation might suggest the Reserve Bank would raise interest rates. But in this case, the Reserve Bank may actually choose to look through the short-term inflation spike rather than tightening monetary policy.
Why? Because raising the cost of borrowing during a global shock could risk pushing the economy into deeper trouble.
Why War Can Hurt the Economy - Even Without Higher Interest Rates
Higher oil prices affect more than just petrol. They increase the cost of transporting goods, moving people, and producing everyday items that rely on petroleum products.
For a country like New Zealand – located far from major global markets – rising transport costs can have a particularly strong impact.
In effect, these price increases act like an extra tax on households. When everyday costs rise, people tend to pull back on spending.
This can lead to several knock-on effects:
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Businesses may delay investing.
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Employers may hold off hiring.
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Consumers may reduce spending.
As a result, economic growth slows – and that slowdown can actually bring inflation down on its own, even without higher interest rates.
Why Mortgage Interest Rates Can Still Rise
Even if the Official Cash Rate (OCR) stays the same or potentially falls – mortgage rates can still move.
That’s because mortgage rates are also influenced by the wholesale price of money, particularly swap rates.
Swap rates reflect a range of factors, including:
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Risk in global markets
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Availability of credit
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Investor sentiment
During periods of global uncertainty, lenders often face higher funding costs. Recently, swap rates have already increased by around 40 basis points, reflecting this rise in risk.
If the cost of funding increases in the wholesale market, banks may still lift mortgage interest rates – even if the OCR itself doesn’t change.
What Mortgage Holders Should Be Thinking About
With uncertainty in global markets, timing interest rates becomes increasingly difficult.
Rather than trying to predict exactly where rates will go next, the focus may need to shift toward stability.
If a mortgage is coming up for refixing soon, it may be worth speaking with an adviser earlier rather than waiting until the last moment. Many lenders allow borrowers to forward fix a rate around 30-60 days before their current rate expires.
Trying to perfectly time interest rate movements is often described as a fool’s game – particularly during periods of global uncertainty.
Key Takeaways
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War and geopolitical conflict can trigger inflation shocks through rising oil prices.
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The Reserve Bank may choose to look through short-term inflation spikes rather than raising the OCR.
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Rising costs can act like an extra tax on households, slowing economic activity.
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Mortgage rates are influenced not only by the OCR but also by wholesale funding costs like swap rates.
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Swap rates have already risen due to increased global risk.
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Mortgage holders approaching refixing may want to seek stability rather than trying to time the market.
Next Steps:
If you want guidance on fixing your mortgage or navigating interest rate changes, the team at Lighthouse Financial can help you explore the best options for your situation.
If you’d like to watch more, check out this other episode below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
