By Eric Frykberg
David Cunningham, a former senior bank executive who is now CEO of mortgage broker Squirrel Mortgages, believes the Reserve Bank might defy most economists' predictions and leave the Official Cash Rate (OCR) unchanged at 5.25% at its next review.
Cunningham suggests his opinion is a lonely one, but he insists he has good reasons to back it up.
The Reserve Bank considers the OCR on May 24 and most forecasts say it will rise by another 25 basis points, partly due to a strong jobs market.
But there is a dissenting opinion from Cunningham, former CEO of The Co-operative Bank, and before that a Westpac NZ executive.
He thinks inflation is globally in retreat after a dangerous spurt, and is in fact coming down faster than was expected.
"Case-in-point was New Zealand’s inflation result for the March 2023 quarter," Cunningham says.
"The market expectation was that it would stick somewhere around 6.9%. The RBNZ, meanwhile, was expecting 7.3%. The actual result was 6.7%. That’s a massive undershoot, especially against the RBNZ’s forecast."
Cunningham says this isn't just the case in New Zealand. Australia, Canada, the United States and Europe were all seeing inflation tracking downwards.
Cunningham says after 11 OCR hikes in the last 18 months the impact of this is still feeding through.
"In my opinion, forging ahead with any more OCR hikes at this point would be lunacy. And I don’t think the RBNZ is run by lunatics," Cunningham says.
He adds another reason for saying the OCR will stay put: Financial markets were already pricing interest rates to fall, with long term rates sitting much lower than short term rates.
"In other words, interest rates are expected to fall.
"Other than the one-year term, which is heavily impacted by movements in the OCR like April’s surprise 0.50% hike, many lenders are pricing interest rates to start coming down."
Cunningham says the timing of interest rates falls was the big question.
"But towards the end of 2023 I’d expect to see falls of up to half a percent for many fixed rate terms."
Cunningham went further, to question the justification of banks for raising interest rates up till now, faster than they should have, especially in the wake of the OCR hike on April 5.
"If we look specifically at the two-year fixed rate, most banks pushed through a 0.10% increase, taking it to around 6.6% p.a. which is the highest it has been for a decade."
And he argues actual interest rates were out of kilter with swap rates.
"Right now the two-year swap rate is about 5.1%, below recent averages and well below the peak. And yet two-year mortgage rates in market are at decade-long highs.
"This won’t last, and bank competition for business will see the two-year fixed mortgage rate fall. In fact, one of the second-tier banks is already offering rates 0.25% below the major banks for that term."
Cunningham argues central banks in the US and Australia are coming to the end of their tightening cycle and are expected to change tack.
"The monetary policy transmission mechanisms are much slower in New Zealand than Australia due to the prevalence of fixed rate mortgages," Cunningham says.
"So it makes even more sense for our Reserve Bank to watch and wait. To hike rates any further will do more harm than good."
He suggests retail rates will fall next year and so people should not fix long term.
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