The ‘remarkable’ rise in the interest rates banks pay - and what it means for your mortgage

Friday, 12 December 2025

A “remarkable” increase in the interest rate banks pay followed November’s Reserve Bank Monetary Policy Statement, despite the Official Cash Rate being cut by 25 basis points to 2.25%, Westpac’s chief economist says.

Westpac this week hiked its two to five-year interest rates.

On Tuesday, the bank said it was increasing some of its long-term rates by 30 basis points.

Westpac was the first major bank to raise long-term rates, a move that has since prompted other banks, including ASB, to make changes, including temporarily removing discounts it offers some of its home loan customers.

For now, ASB isn’t offering discounts on any of its mortgage rates, except for its six-month and floating rates.

The OCR went down, why are we seeing home loan rates go up?

“We’ve seen quite a remarkable increase in wholesale interest rates since the Reserve Bank cut the OCR,” Westpac’s Kelly Eckhold told Stuff’s Sam Hayes.

“And that’s because, even though they cut the OCR, they unexpectedly called time on the easing cycle.”

Financial markets were not prepared for that move, with the expectation that there was going to be another rate cut, Eckhold told Stuff’s Samantha Hayes.

He said banks now had to remove that thought from their minds and adjust to the potential “risk” of a higher cash rate in 2026.

Asked whether banks like his will lose customers as a result, Eckhold was not worried.  “It’s a competitive market, isn’t it. So the extent to which the interest rates are different is always possible.”

Too early to say if interest rates are all up from here

Eckhold was not prepared to say that the good times for mortgage holders were over when it came to interest rates, saying instead that he thought financial markets had “overshot” with the rate hikes.

“The Reserve Bank wasn’t telling us they were going to increase rates in the foreseeable future. Their forecast suggested that would be more like a 2027 affair, whereas the financial markets are looking at the middle of next year,” he said.

Despite this, Eckhold did not rule out a “re-evaluation” of interest rates when the next OCR rate comes out in February.

“Anything is possible,” he said, adding that what Reserve Bank Governor Anna Breman said about interest rates not being pre-planned was 'sensible'.

Despite the hikes, Eckhold said he believed his bank had a “decent” deal on offer, while also telling Stuff’s Damien Venuto that now would be a good time 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.”

“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,” he said.