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ANZ economists point to a 'sharp disconnect' between what NZ analysts and offshore pundits believe the Reserve Bank will do on interest rates this week

Bonds
ANZ economists point to a 'sharp disconnect' between what NZ analysts and offshore pundits believe the Reserve Bank will do on interest rates this week

ANZ's economists are pointing to a "sharp disconnect" between what NZ-based analysts and those offshore believe the Reserve Bank (RBNZ) will do when it reviews interest rates this week.

New Zealand economists are expecting the RBNZ to be a world leader in tightening monetary policy with its Wednesday, August 18 Monetary Policy Statement (MPS).

"All Bloomberg-surveyed New Zealand-based analysts are expecting a [rate hike] on Wednesday, whereas very few offshore analysts are," ANZ chief economist Sharon Zollner and strategist David Croy say.

They say this reflects that NZ is currently in a "unique position globally", but also that there’s very reasonable doubt about the outlook over the medium term.

Generous monetary and fiscal stimulus, minimal Covid restrictions and the disruptions to imports and labour supply have seen the NZ economy experience "a hyper-speed business cycle", with resource and inflation pressure evolving very rapidly.

"Monetary and fiscal settings were of course calibrated for the much worse scenario we all expected last year, and so have overachieved. House prices rising 30% [year-on-year] was not in anyone’s plan, and it’s time to steady the ship and shift the focus from recovery to resilience," they say.

"Offshore analysts doubt the RBNZ will have the gumption to go it alone and accept the significant risk that they’ll have to reverse course before long. We don’t."

Zollner and Croy say that historically, when local vs offshore analyst divergences occur, "actual medium-term outcomes tend to lie somewhere in the middle".

"And it’s easy to describe scenarios where either the NZ economy capitulates pretty fast for one reason or another, or else offshore central banks are wrong to be so confident that they don’t need to respond to inflation pressures. Or worse, both.

"And while the market is absolutely correct to be dubious about just how far this hiking cycle is likely to get, the case for a hike this week is no less clear for that. The RBNZ has to weigh up the risks on both sides, and made it clear six weeks ago that in their minds, the super-low OCR [Official Cash Rate] is now doing more harm than good. We concur."

If New Zealand does raise its official interest rates it will be for the first time in seven years - a point ASB economist Nat Keall draws attention to.

"With the OCR at an all-time low even prior to Covid’s emergency 75bps cut [in March 2020], this’ll be the first hike in a very long time. Indeed, with the exception of a handful of short-lived hikes in 2010 and 2014, the OCR has been on a downward trend for well over a decade. Your 26-year-old columnist can’t quite believe the OCR can go up as well as down," he says.

"During the post-global financial crisis era, the RBNZ began reducing stimulus on a couple of occasions (those aforementioned 2010 and 2014 rate hikes), only to have to begin reversing course less than a year later as it became apparent the economic recovery was proving more sluggish than anticipated and inflation was more likely to undershoot than overshoot the target band.

"While it’s certainly conceivable the [RBNZ] might need to perform a similar U-turn once again – particularly in the event of a Sydney-style delta variant outbreak – this time around, we actually think the risks are skewed towards both a faster pace and greater scale of OCR hikes than our core forecasts imply.

"The reasons for this divergence in outlook from the latest recovery are manyfold. Global demand is recovering much faster, supported by wide-scale fiscal and monetary stimulus. The NZ border closure and lack of inward migration has seen the labour market hit capacity much earlier than in previous recoveries. The tight labour market is working in tandem with logistics disruption overseas to boost supply-side inflationary pressures at a speedier clip than is usual at this point in the economic cycle.

"As we noted last week, the uptick in inflationary pressure and the strength of the labour market have been such that we wouldn’t entirely rule out the RBNZ seeking to get ahead of things with a double-bubble 50bps hike. Similarly, there’s plenty of scope for the OCR to finish up at a higher endpoint than the 1.5% we expect it to hit in the latter half of 2022.

"While both wholesale and retail rates have pre-emptively moved higher over the past month or so, we still see more upside risk than downside and it’s a prudent time for borrowers of any shape and size to be reviewing their interest rate exposures," Keall says.

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47 Comments

It'll be interesting to see how the FX market reacts on Wednesday.

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Agreed. It seems to an OCR hike is already factored in.

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Looks to me as if a 50bps hike is already priced in.

I do wonder if "offshore" analysts can be bothered thinking about NZ at all.

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So anything less than 50bps, we should expect the NZD to drop. Presumably.

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RBNZ… NZ stands for New Zealand. It has to do what’s right for NZ and it’s not about what off shore analysts think thankfully. It would be great if these offshore analysts can actually find NZ in a map first before talking about our OCR.

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Yep they wont do it. If they do it will be .25. The excuse will be covid.. the reality will be that the people making the decision still have more gravy to slurp.

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.25 methinks .. means not much but allows them to be seen to be doing "something".

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So if we get a .25 increase, what does this mean for retail mortgage rates? The banks have already increased rates in anticipation, so one can only assume they'll be double dipping to maintain their excessive theft Oops, I mean profits...

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If they don't, then they are just kicking the can down the road and in the meantime inflation will get worse. Savers have been given a raw deal.

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If they don't, then they are just kicking the can down the road and in the meantime inflation will get worse. Savers have been given a raw deal.

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Max 25 points. Possibly of 0 too.

Yes, Delta will be the reason.

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Delta is the new monetary policy. Like everything else, NZ will definitely play a part, although I genuinely hope it won’t happen here…

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I am going with the Zero. Especially with the Christmas and the Wedding coming and the Vaccination stalling and Aussie getting worse. Inflation is the least concerning issue right now. Banks are drum rolling that scare. RBNZ should know that.

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"Offshore analysts doubt the RBNZ will have the gumption to go it alone and accept the significant risk that they’ll have to reverse course before long. We don’t."

Why do the offshore analysts think the RBNZ are cowards? And what are these 'significant risks' ye speak? House of cards scenario?

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Don't think coward is applicable to gumption. Gumption is "the ability to decide what is the best thing to do in a particular situation, and to do it with energy and determination" This defn sums up the RBNZ or Orr specifically.

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Fair point.

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I suspect the same ... i.e. I doubt RBNZ will change the OCR up and go it alone.

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Does it even matter? The damage has already been done.

It doesn't matter if prices level off or keep increasing with whatever bumbling the incompetent RBNZ do, all the non-homeowning middle-class professionals I encounter are long past caring about the kiwi housing extortion and are now just making plans to leave.

Good luck trying to find the good nurses, teachers, doctors, engineers, accountants, lawyers, tech workers, builders and whomever else a properly functioning society needs in the coming years.

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Yes exactly. Who gives a #$%. Far too.much damage done already.
We - as a country - will pay the Piper at some point in the future for this epic debacle of a failure.

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Yeah, the teachers are reportedly lining up to leave.

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I keep hearing about this mass exodus, but anywhere half attractive is experiencing the same sorts of housing issues as NZ.

The only uniqueness about NZs situation is how we've managed to largely avoid Covid-19. If people want to forego that for milk and honey somewhere else they're welcome to the world out there.

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You do realise that the ones paddling the exodus story aren't the ones moving right?

The whole point of the narrative is to instigate people to move so that they can have a bigger pie to themselves- whether it's lower house prices or a less crowded bus.

Though I seriously doubt their determination in propagating that narrative will actually improve their 'wellbeing' by 1 iota.

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Your clown fantasy narrative bears little resemblance to reality.

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Nowhere gives you less bang for your buck than New Zealand.

The exodus is coming.

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Actually, outside of Sydney house prices in Australian cities are significantly more affordable than in Auckland and Wellington, the pay is better, and the general cost of living lower...I would still be there if it weren't for family things....right now it's amazing to be in a country that is covid free, though

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Whosoever left will be home owners & property investors, they will not be ready to slog there arse & work after making huge profits in property boom.
This is Ardern's 'kind' New Zealand where there is no space for less fortunate & as she said she will reduce poverty, haven't said by pushing them out of the country.

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Never underestime errORR.

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Great pun, mate.

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Just remember people if the OCR increases just .25% it has double the governments interest on debt and at the moment thats a large number. The OCR has been declining long before C19 and will continue to because the currency is devaluing, why do you think house prices are increasing , the house itself hasnt increased in value it cost more money to purchase the house as the buying power of a dollar is declining. The OCR will not increase anytime soon.

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You have history on your side. At this stage, they are cornered so continue to destroy the currency; not the bond, house or share markets.

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probably 50pt rise but could be 25 under if they are overly cautious

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I think it will be 25, unless they think inflation is worse that the figures show.

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Bracing for yet another disappointment, RBNZ are extraORRdinarily good at delivering this...

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Zero ORR 0.25, Zero ORR 0.25....???
What an ORRfull dilemma

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The more I think about it the more I'm leaning towards zero.

Reason? Delta. If Orr increases OCR and we get into a level 4 lockdown, he's gonna be regretting any increases.

Delta is a very real threat. 100% of recent cases in MIQ are of the Delta kind.

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Delta can also be eliminated. We are going to have covid for years and years, if not forever. So they have to do it at some stage. And like delaying lockdowns, inflation will only get worse.

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Market sentiment aside, if delta has the same effect on our economy as the last lockdown did, why would you not be raising rates ? Covid has seen a massive increase in economic activity internally - particularly that house swap activity where you buy something, add 200k to what you paid, and the next guy gives you the money _ Its a miracle !

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Seems to me that half our problems in New Zealand are the result of celebrity economists getting way to much press time and doing way too little actual analysts to back up the opinions.

This is the reason overseas economists differ from ours. They aren't excitedly predicting ruin every other day to get press time, they are just sitting in a room somewhere looking at the figures.

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Seems to me that half our problems in New Zealand are the result of celebrity economists getting way to much press time and doing way too little actual analysts to back up the opinions.

This is the reason overseas economists differ from ours. They aren't excitedly predicting ruin every other day to get press time, they are just sitting in a room somewhere looking at the figures.

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Seems to me that half our problems in New Zealand are the result of celebrity economists getting way to much press time and doing way too little actual analysts to back up the opinions.

This is the reason overseas economists differ from ours. They aren't excitedly predicting ruin every other day to get press time, they are just sitting in a room somewhere looking at the figures.

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Seems to me that half our problems in New Zealand are the result of celebrity economists getting way to much press time and doing way too little actual analysts to back up the opinions.

This is the reason overseas economists differ from ours. They aren't excitedly predicting ruin every other day to get press time, they are just sitting in a room somewhere looking at the figures.

Up
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Seems to me that half our problems in New Zealand are the result of celebrity economists getting way to much press time and doing way too little actual analysts to back up the opinions.

This is the reason overseas economists differ from ours. They aren't excitedly predicting ruin every other day to get press time, they are just sitting in a room somewhere looking at the figures.

Up
0

Seems to me that half our problems in New Zealand are the result of celebrity economists getting way to much press time and doing way too little actual analysts to back up the opinions.

This is the reason overseas economists differ from ours. They aren't excitedly predicting ruin every other day to get press time, they are just sitting in a room somewhere looking at the figures.

Up
0

Seems to me that half our problems in New Zealand are the result of celebrity economists getting way to much press time and doing way too little actual analysts to back up the opinions.

This is the reason overseas economists differ from ours. They aren't excitedly predicting ruin every other day to get press time, they are just sitting in a room somewhere looking at the figures.

Up
0

Seems to me that half our problems in New Zealand are the result of celebrity economists getting way to much press time and doing way too little actual analysts to back up the opinions.

This is the reason overseas economists differ from ours. They aren't excitedly predicting ruin every other day to get press time, they are just sitting in a room somewhere looking at the figures.

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Another offshore analyst getting it wrong, we should ignore them all, they are almost as bad as Westpac.

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Not now, they are bang on. Community case now a reminder to us all, this ain't over yet "team of 5 million" (eeeek, there I said it!).

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