The low-interest party just ended. Here's why a major bank hiked rates despite the OCR

Wednesday, 10 December 2025

Westpac announced late on Wednesday afternoon that its longer term rates would be increasing.

The bank has increased its longer-term rates, ranging from two to five years, by 0.3%.

Kiwis could be forgiven for looking at this and wondering why on earth the bank is increasing rates when the official cash rate (OCR) is the lowest it’s been for years.

This is fair enough. We do tend to regard the OCR as though it’s the interest-rate oracle, viewing it as the single source of information on when rates might rise or fall.

But banking is, of course, more complicated than that.

Long before the OCR moves one way or the other, there are other forces that also play a significant role in determining how the interest rates we pay are priced.

One of these forces lies in the wholesale rates, which are essentially the cost of borrowing large sums of money between financial institutions like banks and investment funds. You can think of wholesale rates as the cost for a bank to gain access to the money they provide to you for lending.

For banks to remain profitable, they need to make a margin on the lending they get from the wholesale market.

This means that if you want an early indication of where interest rates are headed, it pays to look at what’s happening in wholesale rates.

And this is where things become interesting right now.

Kelly Eckhold, the chief economist at Westpac, tells me that in the week following the Reserve Bank’s decision to bring the official cash rate down to 2.25%, we started seeing wholesale interest rates (particularly the longer-term ones) moving in the opposite direction.

Eckhold explains initial expectations placed a reasonably high possibility on a further OCR cut in the new year, but the Reserve Bank Governor sent a message that the easing cycle was likely coming to an end (albeit leaving the door slightly ajar).

That message has been noticed by the market.

On the back of those comments, the perceived chance of a further OCR cut in February dropped from around 60% to only around 20% now.

According to Eckhold, market analysts have also brought forward their view of when the OCR will rise above 2.5%.

Rising tide

If anything, the current situation is a reminder that what the Reserve Bank Governor says around the OCR decision is often more important than the actual decision itself.

Prior to the OCR decision, most market analysts anticipated that we could see the OCR drop to 2% by the middle of next year, with a rising trend after that.

But that’s no longer the case.

Eckhold says current market pricing indicates that we could see the risk of an OCR hike from 2.25% from May and a full hike by October 2026.

This is even faster than Westpac originally forecast, with Eckhold’s team originally suggesting December as the moment we might see a full rate hike.

The rise in wholesale rates comes as a direct result of the comments made by the Reserve Bank, and this, in turn, impacted the mortgage rates we pay faster than expected.

The important thing to remember here is that changes to longer-term fixed-rate mortgages are usually priced in advance of the OCR.

Think of this as a series of dominoes. The Reserve Bank sends a message to the market. The wholesale market responds by pushing up rates. This means banks end up with narrower margins and therefore push up their interest rates. Thereafter, we have another OCR decision and the cycle of listening for those comments starts again.

Looking at all the market signals, Eckhold says it’s a good moment to think about locking in a longer-term rate.

“The implication is that this is the time of the cycle where any borrower should consider hedging against the possibility that rates start rising,' says Eckhold.

“The fact that those longer-term wholesale rates have already risen is narrowing the margins that banks have, so there is an increased chance that longer-term mortgage rates start to rise… So, now you've got to [question] if this is as low as it gets. And if that's the case, then the benefits of going longer look more attractive.”

The coming rollover

Michael Vincent, the director of mortgage operations at Lighthouse Financial Services, says an estimated $160 billion in mortgages will refix in the last six months of 2026, accounting for four in ten home loans across New Zealand.

“It’s going to be a critical moment,” says Vincent.

“Take a $700,000 mortgage: the difference between 6.9% and 6.5% might not sound huge, but it’s roughly $2,800 a year in savings. Add a cashback, and the benefit often outweighs the legal costs by a long shot.”

Vincent says in addition to taking advantage of interest rates while they are low, homeowners should look to see what other banks are offering.

“You only benefit if you’re proactive,” he says.

“Instead of defaulting to your bank out of habit, compare your options every time your fixed term ends. Don’t assume your bank’s first offer is the best offer. Ask for cashback incentives, fee waivers, or better terms, because that’s what new borrowers are doing.”

Vincent says homeowners who benefit the most from the competitive market tend to ask questions, seek advice and aren’t afraid to move.

“If you’re refixing or refinancing in 2026, don’t assume your bank is doing you a favour. Make them earn your business, or let someone else.”

Where to next for homeowners

It’s fine to take your mortgage seriously, but it’s important not to panic and fall into making decisions driven by the fear of missing out.

Samantha Wilson, a mortgage adviser at Mortgage Life, says so much of this depends on the personal circumstances of the individual.

“We are always going to have clients that want to take the gamble, convinced there will be further cuts, and some that need/want the certainty of longer terms,” she says.

Wilson says things can also change quickly.

“It only takes a global economic event to really mix things up,” she says.

“We also have a big year ahead in 2026 with an election on top of ongoing challenges in supply chains. While inflation is deemed to be under control for now, the next monetary policy could change views again.”

Wilson adds that a mortgage doesn’t have to be an all-or-nothing situation, pointing to the example of splitting your lending to spread the risk in the event rates do eventually go up.

“The reality is that rates will go up,” says Wilson.

“It’s just debatable on when and by how much at this time.”