Retail interest rates could now be getting close to their peaks after the latest Consumers Price Index figures indicated inflation may be at last slowing.
The Reserve Bank (RBNZ) is now likely to be faced with wholesale interest rates pricing in a lower peak to the Official Cash Rate than it has been forecasting.
While the actual inflation result - annual inflation as of the December quarter staying the same (from September) at 7.2% - may not in itself seem encouraging, the fact that domestic-generated inflation considerably undershot expectations was perhaps a clear sign that the interest rate hikes we've already seen could now be having an impact.
The RBNZ, in its extremely hawkish Monetary Policy Statement in November forecast that inflation would rise to 7.5%, while it saw domestically generated (non-tradeable) inflation rising to 7% from 6.6% as of September. In the event the domestic inflation came in at 6.6% again.
Based on its hawkish forecasts the RBNZ had indicated there would be another 75-point rise to the Official Cash Rate (currently on 4.25%) in the next review on February 22. And the RBNZ forecast the OCR to peak at 5.5% in the middle of 2023.
But based on the actual inflation outcome, it can be anticipated that wholesale interest rate markets will now start 'pricing in' a lower - 50 basis point rise to the OCR next month. Retail interest rates are most strongly directly influenced by what happens in the wholesale interest rate markets, so an easing in those markets will likely indicate that we are now close to the top in terms of mortgage and deposit rates. But that doesn't mean these rates will be coming down any time soon. Much will ultimately depend on how long the OCR stays up.
While there's a perhaps unusual diversity of views coming out from the economists on what happens next, several have come out very clearly in favour of the RBNZ hiking the OCR now just by 50 points in February and, importantly, not ultimately raising the OCR as far as it has said it will.
Economists at the largest bank, ANZ, changed their call of what would happen at the next OCR review and are now expecting a 50 point rise - and a peak OCR now of 5.25% against their earlier expectations of 5.75%.
Kiwibank economists said "enough is enough" and said they thought the OCR would rise by 50 points in February - but should only rise by 25. And they see a peak of just 5% now.
Westpac economists are now forecasting a 50 point rise in the OCR in February policy meeting (having previously forecast a 75bp increase). "We continue to expect a 50 bp rise in April with a pause after that time. Those increases would take the cash rate to a peak of 5.25% - lower than the 5.50% peak we previously projected. That’s also below the 5.50% peak that the RBNZ had signalled in their last published forecasts from November".
ASB economists are still picking 75 points in February "but acknowledge the risk of a more moderate pace of RBNZ hikes (including 50bp in February)".
BNZ economists said the inflation outturn "left us more convinced that the Reserve Bank does not need to raise its cash rate by 75 basis points when it delivers its rate-set verdict on February 22. Unfortunately, it leaves us equally convinced that, in the eyes of the central bank, it will be a line ball call." BNZ is still officially picking a 75 point rise.
ANZ economist Finn Robinson and chief economist Sharon Zollner said inflation is "clearly still far too strong", but the stabilisation in non-tradables inflation is a welcome development.
"The inflation numbers clearly weren’t as bad as the RBNZ feared in November, and signs that inflation will ease meaningfully over 2023 are becoming increasingly clear."
Robinson and Zollner say, however, that the RBNZ "will be wary of giving markets a free rein" to start pricing in OCR cuts, which could see fixed mortgage rates fall meaningfully. They believe OCR cuts "remain firmly off the agenda" for the foreseeable future unless some "left-field event" happens.
BNZ head of research Stephen Toplis said market pricing could yet determine the February OCR outcome, "especially if the Reserve Bank is walking the tightrope that we think it is".
He said if financial markets push strongly for a 50 point move "it will be hard for the RBNZ to stand in its way".
"Irrespective of our final call on the Reserve Bank’s likely actions, we maintain our long-held view that a peak in the cash rate of 5.50%, as touted by the Bank in November, is probably unnecessary."
Westpac acting chief economist Michael Gordon and senior economist Satish Ranchhod said they are still updating their forecasts "but at this stage it looks like inflation will track well below the RBNZ’s forecast over 2023".
"...We’re still left with a strong inflation outlook and the need for continued interest rate increases to get inflation back inside the 1% to 3% target band. However, the extent of further policy tightening required to do that doesn’t look like it will be as large as the RBNZ had previously assumed. As a result, we’ve revised down our forecast for the peak in the Official Cash Rate," Gordon and Ranchhod said.
The Kiwibank economists, chief economist Jarrod Kerr, senior economist Jeremy Couchman and economist Mary Jo Vergara said the case for a smaller increase to the OCR in February is building.
"The NZIER survey showed business confidence plunged to an all-time low in Q4. An overwhelming majority of firms see a deterioration in economic conditions ahead and expected trading activity fell to near GFC lows.
"On housing, the latest REINZ market update showed that the correction continues, with December marking the 13th consecutive monthly fall in house prices. And today’s [CPI] report revealed that an downtrend in inflation is forming.
"With each outturn, the data are showing a weakening economy. Rate hikes are working, already. We don’t need more outsized, catch-up hikes."
55 Comments
The price of Gib is going up 15% next month.
There's a dearth of experienced trades workers in their 30s and 40s due to a weak apprentice system in the 90s and 2000s, and a bunch of guys in their 50s and 60s getting out of dodge because the industries a basket case.
Activity needs to be well below 2019 levels to see any serious discounting.
Probably at least 50% I'd say. The drop will be inconsistent though across regions and sectors. You'd have to anticipate more than that for new greenfield subdivision builds.
Difficult situation to ready accurately, because the industry has been stuffed by a combo of too much work, and longer than average lead times for key construction components (windows/joinery, that sort of thing).
They'll be inter-related.
I am seeing price reductions, not so much in the pure building materials per se but in availability of some items that are now in excess stock: flooring, some engineered products. Also much better availability of labour on my main building site - coming from jobs that have been 'put on hold' just prior to Xmas.
Some trades going for gold to get as much cash as they can, others doing the opposite and trimming their offers to secure work for the year.
March 2021 was all time record month for new mortgage commitments. 10.5 billion to 31000 borrowers.
So that makes March a peak month for fixed rate rollovers. RBNZ will go 75 BPS for next increase. Not because it needs to. But because they need things to get worse for consumers in the shorter term so they have excuse and room to cut 25 bps at least twice before October election and signal to the voters that further cuts will be possible following the election if current economic management continues. When the government of the day appoints the RBNZ governor and the members of the MPC. A truly independent reserve bank does not exist.
Yes.
Currently Orr is better to overshoot and smash inflation.... seems he can get away with either direction at the moment tho.. but i reckon a lot will come down to politics now. He and his mates at rbnz will want an easy ride for the next few years which is more likely under labour.
National smashed Orr and the RNBZ last yr when he was reelected so he prob wont want them as a govt. Labour voters prob would rather see inflation down than interest rates level off. Tbh thats also better for the country as a whole, our kids, social cohesion, infrastructure, public servie quality and general wellbeing. So orr would likely bump the rates up and position the move to help labour. Possibly with a view to give a dovish statement on future moves coming up to election.
National and the banks are def profit centric at the expense of everything else. Dont care about widening inequality (in fact they are and support the elite who want more) and want high house prices (coz they own most of them) and screw the middle class and poor... not sure about the banks but national have stated they want orr gone. So i cant see orr supporting a plateau of rates to help house prices, investors and thus support nats and their base.
I pick .75 raise with warning of more to come if inflation persists.
Indeed. Lots of soft landing rhetoric. We need to slam the door on inflation. Go "hard early" to quote somebody. Yes there will be some over leveraged that have to sell on todays market.
Que lead article on the herald online this morning- almost tooked sponsored. Looking at the math they should indeed sell and try to buy a house they can actually afford. Maxing out on 2% rates was always going to lead to this position.
Very few people here seem to realise that the RBNZ has an employment and financial stability mandate, as well as an inflation mandate - thanks to the current government. These have to be balanced.
So there’s no chance in hell that the RBNZ will keep hiking the OCR until inflation is 2%. That would mean unemployment skyrockets, and financial stability is destroyed.
Clearly my ‘thanks to the government’ was sarcastic.
If they hadn’t changed the mandate then there wouldn’t have been the need to cut the OCR to 0.25%, would there? They obviously cut it so deeply because they were concerned about unemployment and financial instability arising from a covid-related economic crunch, and those things were part of the revised mandate. And that super-aggressive cutting set the pathway for the high inflation we have today.
There was no inflation justification to do so ie. inflation was not super low. That would be the only mandatory reason to cut the OCR to 0.25 if inflation was their sole mandate.
Yes good point, however a mandate differs from a wider economic consideration.
Bollard responded to a real and demonstrable economic slump, that also happened to result in very low inflation. Orr cut on a perceived economic threat that *might* have resulted in severe unemployment and financial instability. Without those mandates would he really have had a compelling reason to cut the OCR so aggressively on the basis of a ‘potential’ economic crash?
As you say other countries cut their OCRs, however few cut anywhere nearly as deeply as NZ, right?
The FED is now fiddling the books so they can pivot and start to drop rates because apparently inflation just miraculously disappeared in December. Honestly nothing would surprise me from this point in time the RBNZ may even hold the current rate and not even raise it.
Just the opposite actually I have no mortgage and money invested. From a pure financial perspective, I don't care if the OCR goes to the moon but if you are "rethinking matters" that is not going to be good for society as a whole and if it keeps on trending this way it will be gated communities, dogs and guns.
Jeremy Grantham at GMO also makes this point that the markets biggest declines have often been after the first Fed rate cut during a recession.
Dec 1979 with minus 79%
Dec 2000 with minus 40%
Sept 2007 with minus 55%
It's going to be interesting to see what happens. Currently its difficult to see many reasons for positivity but we have an abundance of systemic and potentially catastrophic risks.
Also just want to add that I dont believe the inflation narrative. I think we will be living with it and or price spikes for the foreseeable future.
The articles telling that cash rates have reached peak have been in circulation from the start of the last year.
Still the rate keeps on increasing. How long it took last time to bring inflation under control? Have we not learned anything.
Where are the lessons learned?
A big issue I see is that even prior to this bout of inflation the inflation rate was only within band because imported inflation was low enough to offset the local inflation that was consistently above target
So unless "imported inflation" drops like a stone we will stay above target unless the Gov is prepared to destroy the economy
and two of the key drivers of this predicament are local body/govt service providers and the entrenched monopolies we have here in NZ who have the ability to continue to price up. Neither group recognises their contribution or are looking to make changes despite the rhetoric - so we had better hope Chinese deflation saves the day
Nice. Sheriff is indeed frozen, but the ship is taking on water (inflation) and he has to increase the pump pressure (rates) to stop sinking.
Most NZers dont have a mortgage and would much perfer inflation to go back to 2-3%. The minority over leveraged are having sick feelings thinking about rates hitting 7-8% or more.
Which group will Orr save...
If Labour wants to throw some money around and win some votes in an election year, and hey let's be wild here and assume they do, they could get in front of the likes of Aldi and ask what it would take to get them to set up here.
They could also break up Foodstuffs.
Neither will happen of course. Back to my morning coffee.
The absolute absurdity of the situation.
Politican decision in the US to remove direct house prices from CPI. NZ eventually follows suit.
This allows interest rates to fall to very low levels while driving up the value of consumers largest purchase.
Now on the downside with with higher inflation and falling house prices we see much higher than needed interest rates and people going to the wall due to very high mortgage payments.
This is simply insanity.
According to Westpac Chief Economist. New Zealand's Effective mortgage rate is currently 3.7% and will rise to 5.3% by the end of the year.
Approx 640,000 households are servicing a mortgage on the house they live in. New Zealand has 337 Billion of total mortgage debt.
So that is a rough average of 520K each per household. 1.6% additional mortgage interest will be 5.4 billion per year or $8300 per
household average.
Labour has an interesting year. Forcing min wage up will just keep accelerating inflation. They need to look at the other end of the ledger. Everyone's unavoidable need is shelter and food.
Keep building state houses at density and continue to crush debt based tax avoidance.
Couldn’t agree more. Consistent increases in the minimum wage and the scrapping of the youth wage, have eroded the lower spectrum of middle income earners. Add the current inflation and cost of living increases which has eroded even further, and if folk dont change jobs soon to get a pay hike then they wont be able to easily once the unemployment rate starts ticking. A challenging year ahead indeed
Why does it seem that media/commentators are celebrating that inflation was lower than what RBNZ predicted...after all this is the RBNZ that had pretty much got every prediction wrong since the start of all this mess. There are no real positives out of the latest CPI, I guess that it hasnt gone up further is the only one.
Maybe its just me, but it feels that the banks are trying to save themselves and pleading for the OCR to stop rising. They are happy for a really long slow path to getting inflation back down, so longer pain for everyone. I would rather take the hits now if it means we can get inflation down quicker.
We're at a global tipping point. It could go either way.
Offshore inflation has stabilised [???] they tell us. I wouldn't say that it's decreased, especially when you factor in the methodology massaging that occurs inside the state to back their own narratives [lies].
In NZ, untradeable inflation is still far too high. The cost to run the govt along with their regional cousins, is still way too much. My guess is their contribution to our national GDP is in the negatives.
Add to this the 350,000 working-aged people who are sick, sad or sorry receiving 'benefits' & you can see we have huge unproductive issues weighing us all down. If half of this lot were employable we wouldn't need to immigrate.
Add to this the rising racial divide being opened up by the current govt & the ingredients for this cake currently don't look that appetising.
If I were young I would go to Australia, but it is far from perfect over there either. Their energy issues don't look like they're going away, especially with a left-of-centre govt in place, along with their indigenous moment in the sun also front & centre. The UK is struggling. The USA is not one nation any more, it's at least two [probably more] & with Canada being run into the ground by their own version of liberal lunatics, the choices are reducing.
Struth. It'll be down to South America soon.
Or Russia. I see they're looking for more active young people. Can't think why? Failing that China is looking for more babies. Perhaps we could do a deal with them?
I believe there's a saying always trust the bond market, but I think this bond rally is crazy, and has got reality all wrong. I've been waiting to buy back into longer bonds, but have shelved that plan until the next OCR call end of February hoping reason comes back.
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