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.
54 Comments
There is the problem right thier...
From land to eggs to cars we have a serious, conflict of interest from all suppliers
Take a staged subdivision... The developer opens stages when buys are hot and then when they are not he delays the stages!... Thus screwing the price for greed!
Council's should say " if you have land to develop it must all be developed and sold in one stage at one time'! No price manipulation by controlling supply.
That way property will be cheaper and supply good during the tough times.
Same applies with vegetables! Weather events that limit supply is a result of mismanagement of land and growing area diversity ( having all your eggs in in basket)
If for example broccoli is only grown by one or two dominant suppliers then they should be made to split off thier business to create competition
National and international price fixing is rampant and should be removed to create competition.
Same applies to apple, Samsung and most price controlled ( manufacturer) products.
You’re comparing apples and oranges…
the vege grower has supply agreements with intermediary and shelf life of lettuce is short; while the developer generally doesn’t…
also, if we forced developers to release supply as agreed then risk of project increases with unfavourable effects to the hopeful homeowner.
we're at the end of the first year of reported high inflation, even if the inflation rate is somewhat less than the last peak it is above the target range and now has a compounding effect. I also don't see enough indications that inflation will not remain elevated if we pause or dip rates. IMHO that would be lunacy
Yes these premature calls we have been getting for the last 4 months from the vested interests have been wrong everytime and are getting quite boring. The OCR will rise 0.25% this month in my opinion. Isnt inflation still over 6%................Look at the job market and consumer credit numbers out of the US last night, the spiral is still spinning.
Had an email yesterday from a REA - "interest rates have peaked, investors are back in the market, there's been increased numbers of immigrants and they are buying our houses, so come buy your rental investment property now". - I didn't sign up for their newsletter, though I had enquired about a property which was already marked down 40%, with a 3% yield....
Hope springs eternal?
TA was on stage at Plastics NZ conference on Friday.
Very difficult to capture his views (given caveats) but to summarise:
* Kiwis spent big over pandemic on toys and renovations. Therefore going to be little demand for such luxuries. However Kiwis will spend big on holidays, especially international travel. Despite cost of living crisis, there is a general feeling after several tough years people deserve a special holiday.
*Salary increases have been outperforming cost of living crisis for most people. (although there are some losers)
* This plays into the paradox that kiwis feel safe in their jobs. He does not feel a recession is coming, but the media are talking themselves into one. Clear message doint listen to MSM. Employeers dont want to let staff go, as they cant find adequate replacements. This means companies are instead wrongly cutting back in CAPEX (hitting productivity).
* Because of a lack of staff, dont spread yourself too find. Concentrate on good customers, (drop your bad ones they are not worth your time). Focus your team on top 3 items.
* 3 year cheaper mortgage rates are a ploy and show the banks expect cheaper rates in future. Dont lock in long.
* Labour will want to hand out goodies with upcoming election, but know they cant as it will lead to RBNZ simply raising OCR. He will be watching Grant Robertson with glee this month.
* OCR has peaked. Early investors already going back to market to get good deals ..... They can see migration numbers are going up. So going to be a basic supply and demand and when coupled with OCR dropping back down.
*Always a lag in OCR to people feeling a pinch. Raise OCR now its going to overcompensate.
*OCR is going to rapidly decline but not to levels we say 2-3 years ago.
*Australia/NZ banks not at risk like US counterparts due to different regulations. See BNZ record profits.
* Brain drain to australia will not be a problem given the migration numbers.
*During GFC when goverments printed and it was deflantionary. This time its inflationary. No one could have predicted this.......
*Started talk with, take all predictions from economists with a grain of salt (another natural disaster, war, or pandamic will disupt all models) finished on why we should listen to him, and sign up to his newsletter.
*During GFC when goverments printed and it was deflantionary. This time its inflationary. No one could have predicted this.......
What a lot of hogwash!
The big difference between the GFC response and the COVID response is that governments threw heaps of money (often via helicopter drops!) during COVID but didn't do anything like as much during the GFC.
Or put another way - it doesn't matter where the 'free money' comes from just so long as there is enough of it.
But no - central banks thought even more 'free money' was needed and the worst of the lot was the RBNZ.
The punchbowl was so massive and so heavily spiked that a mass hangover was assured.
No one could have predicted this ...
A tui moment of staggering proportions! TA must be trying to make friends in central banking circles.
QE is an asset swap for the banks, they give up their bonds and receive reserves in return and these reserves must remain in their accounts at the central bank and cannot be lent out.
https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/…
NZ government yield curve predicts.at least the same.
The title should read "Man with vested interests in extreme housing prices tells us why actions which make housing affordable are bad."
Or maybe a bit more spicy, "Human head louse explains why it is necessary that one does not comb or shampoo here to remove him. He provides a valuable service brokering the parasitic services of high finance on untapped fresh prey in exchange for a fee."
Reserve Banks will just act on data as it is published, believing their own forecasts was the root cause of that transitory inflation saga.
I just don't buy this inflation falling back to target without intervention guff. Globally we now have inflationary forces increasingly acting within our economy.
People love this argument but I don't think it's true.
The cost of swap options that hedge interest rate risk on loans needs to offset the protection they offer so if the OCR increased completely unexpectedly, all other things remaining equal, the cost of swap options on new loans will immediately reflect that in principle. No one would sell swap contracts expecting to make a loss after all.
This argument that it takes some number of months months for rates to permeate the financial system is a misunderstanding of financial system dynamics and would represent a highly inefficient market that could easily be exploited by someone selling swaps now and waiting for interest rates to fall to buy them back at a discount.
You seem to be confusing the 'financial system' with the economy.
Yes financial system responds rapidly. (Especially when they have central banks telegraphing to them where rates are going to stop. Rocket & feather - Is it any wonder they're so profitable.)
The man / women on the street? Not so much. And sometimes - not at all until they're ten feet under.
Remember last year HM I was saying to you that good news (low unemployment) could well be bad news for asset prices as it would give CBs ammunition to continue rate hikes.
And now it might be that if we do start getting bad news (rising unemployment), that this also could be bad news for things like house prices as people have decided to fix to 3+ year mortgage terms, to find that income is dropping/people are losing jobs, interest rates are falling (as central banks start cutting) but there will be no benefit for home owners/debt holders for a number of years until their fixed term mortgage moves to lower rates. Ie because we’re not generally on variable rates, a deflationary recession will still hurt a lot if you are stuck on 6-7% rates meant for a period of high inflation (including rising incomes, not falling incomes)
That's not how you steer a big ship, well, not if you want to avoid calamity. RBNZ need to assess the likely effects that are already in motion but not yet visible, and act with account for the lag. That is why their job is not easy - if it were as simple as looking at currently available data and applying logical rules, that could be done best by a computer. There are good reasons we don't currently have aeroplanes, ships or central banks run solely by artificial intelligence - it doesn't yet have the reasoning capability to handle the nuances of 'reality'.
RBNZ will essentially follow the Fed. 25 bps, moderated language in the MPS. If I'm wrong, I think we're in bigger trouble than we needed to be.
I think the big question from this point onwards is that if the RBNZ raises rates, will the banks actually follow ? I think the housing market will capitulate at 8% mortgage rates and the banks know it. The banks not being NZ owned because we were idiots and sold them all are not going to put their asses on the line.
"all objective measures" are trailing indictors - with many trailing by six months or more.
There'll be one more hike of 0.25% and then a pause ... and then a rapid decline.
The "real pain" is already damn easy to see if these plodders at the RBNZ actually got out more.
Just as an aside - would the 3rd hike you predict be before or after the election? If we see a change in government we'll likely see a change in RBNZ governor and quite likely a refreshed MPC. There are a lot who feel like I do that the RBNZ is dealing with a problem of their own making (i.e. the massive asset bubble) and many, many lives have been ruined irreparably as a consequence.
That will mean the country has to have a conversation about ten percent floating rates…twelve percent 2nd tier rates and thirteen of fifteen percent stress testing…yikes
havent seen one article discuss this point. The whole msm narrative and that of the banks is that this will get tight but we are going to make the runway.
I’m not so sure everyone’s going to walk away from this one folks
there is going to be a hell of a lot of screaming as the “investors” realise they are sitting in the forward cabin seats
we ain’t seen nothing yet but panic will come if the rbnz revise their forecasts up for rate peak
All I hear amongst the white noise is:
"Boohoo My Assets" - https://tenor.com/KZyc.gif
The vested really have no interest in a fundamentally sound economy.
I dont think many of the have the intelligence or interest to understand how economys work.
Most REA and amateur investors seem to truly believe that house prices can magically keep rising and everyone keep spending forever... that this dip is just an inconveniece for a few months before the magic comes back... and suddenly prices will jump again.
Quite interesting to watch.
AI could force things in one of two directions. Most Likely and left to the developers own devices it could quickly eradicate millions of middle class jobs... if they can muddle it with automation.. expect manual labour jobs to follow quickly too.
I am fairly sure it wont result in signìficant gdp growth and anticipate taxes may well fall and unemployment may rise.
In summary.. massive productivity gains, massive job losses.
Better to regulate it and try to slow the speed so humans/economies/govts have time to adapt
Hey. If our purpose was working hard to buy stuff and build bigger and better stuff... judging from our outcomes (climate change /Ai etx) then we prob would have been better all round to have sat back and enjoyed the journey.. grown food and played.. without purpose
Japan has continued with its low interest rate policy and its own inflation is lower than in many other countries, which may just prove that monetary policy is an ineffectual means to control inflation.
Professor Bill Mitchell. "Japan has lower inflation, no currency crisis and its citizens are better off as a result of the monetary-fiscal policy initiatives".
One reason to believe inflation may fade away quite quickly is that businesses have been 'rebuilding margins' but have now largely completed the rebuild (Or are price-takers, rather than price-setters.). I.e. many businesses through covid/Putin saw margins significantly eroded as demand initially decreased but sales volumes were maintained by discounting (i.e. margin erosion). Obviously, some businesses, e.g. banks, were actually able to increase their margins thanks to the absurd actions of the RBNZ.
Thus, if we assume margins have now been fully rebuilt to pre-pandemic levels (possibly months ago) then inflation may drop quite quickly, especially so as the immigration floodgates appear to have opened and workers have lost much to their perceived bargaining power for higher pay rates.
At the same time, some sectors, e.g. construction, are now facing a major correction and margins are evaporating. (Obviously, construction firms are near powerless over their margins if nobody can afford to buy.) The net effect has to be contractionary overall and once again margins everywhere are going to come under pressure.
The net effect? Recession very soon, layoffs and possibly deflation.
OCR drops coming soon once the RBNZ realises they've - once again - over reacted!
Honest Government Ad | Reserve Bank of Australia (oops I think they mean RBNZ as well)
thejuicemedia
https://www.youtube.com/watch?v=DNxXRigHri4
The RBNZ needs to be sacked.
Given the recent undershoot in the inflation numbers, my strategy is to roll over a six-month fixed rate and see how the next couple of quarters unfold for inflation. The government bond yield curve is still heavily in favour of fixed rates coming down sharply in the next year or so. Fixing long term doesn't make any sense at the moment.
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