As foreshadowed on Monday, ASB's economists have brought forward their forecast for a first Official Cash Rate (OCR) cut by the Reserve Bank. They now expect it next August, six months earlier than their previous forecast.
ASB's economists, led by chief economist Nick Tuffley, say the recent Gross Domestic Product (GDP) release was significant, showing momentum in the economy grinding to a halt more quickly than previously anticipated.
"We expect weakness will continue into 2024. If it does, inflation pressures are likely to reduce quicker than we had been previously thinking," ASB's economists say.
"Although current headline inflation is still high, we are also seeing encouraging signs in recent monthly pricing data that show inflation is falling slightly quicker than the Reserve Bank had recently been expecting. And while there will be pockets of migration-driven concern for the Reserve Bank, such as rents and any potential rebound in construction costs, we expect that by the second half of next year the inflation outlook will be comfortable enough for the Reserve Bank to cut."
The OCR is currently at 5.50%. The Reserve Bank's next scheduled monetary policy review is February 28.
21 Comments
At ~7% interest rates aren't particularly high, that's what people forget. In the history of lending, less than 5% is cheap, between 5 and 10 is normal, between 10 and 15 is high and above 15 is usury.
But maybe we're about to enter or have already entered a new paradigm?
We entered a 'new paradigm' when the RBNZ was formed and managing the money supply came out of the hands of politicians and into the hands of people of who, for the most part, have a reasonable idea what they're doing. Their remit is wide but a major focus is keeping inflation around the 2% mark. A level that virtually no politician could sustain except in recessions.
From that time onwards overseas lenders have gained trust in NZ's economy & money supply & the NZD. They have slowly reduced the risk premium that was added prior. Establishing this trust obviously didn't happen overnight and took the best part of 20 years. We still have a risk premium attached though but it is down to the US rate plus ~1% albeit it swings around.
In a global sense, most countries now have a central bank, with many following NZ's lead, that is allowed to operate independently from the government of the day. Consequently, looking back at the 'history of lending' is not a wise move.
Further, economists have shown that in the short to medium term it is the change from the prevailing rate that effects change of economic behavior and not the absolute level of the interest rate. The RBNZ has identified this rate is about 2.5% for the OCR. This matches the prevailing rate between the end of the GFC and covid madness, roughly 2012 to 2020. Add bank margins of 2% (thieves and scoundrels!) and you get 4.5% for residential mortgages.
Thus within this new paradigm, fought for by the RBNZ and NZ Inc, I'd say 3% is low, around 4.5% is normal, and anything above 6% is high.
As we are seeing now, with inflation falling, unemployment rising, businesses failing, consumer belts tightened to a level many can't breath, and looking like a 2nd recession in less than 2 years is coming ... I think we can conclude that 7% is plenty high enough to effect considerable change and quite a bit of pain.
In countries where they target higher inflation rates, you'll notice the central bank's likewise have a higher funds rate.
Of course, those levels could all change if the RBNZ was forced to target inflation at a higher level. Add 3% to their inflation target and 4-5% would get added to the prevailing interest rates. Which is akin to where we were prior to the RBNZ's formation and where your 'historical figures' come from.
So longer as the repayments keep being made the actual number is irrelevant. (It does however indicate that NZ Inc has a constant drain as money is siphoned off by the banking system.)
Of course, as soon as the number of repayments not being made passes a certain level ... Well. A whole different story. To read about that just google GFC.
They will change their predictions very soon.
When all evidence is against them (like now?) and they can no longer hide behind the 'plausible deniability' nonsense.
Then they'll use the 'Wow! Who could see that coming?'', defense.
I wonder if they sleep well at night ...
ASB economists have access to real time data from the millions of transactions passing through their systems.
They will know just how bad things are right now. And they should have seen the progression from way back when the RBNZ forced mortgage & lending rates beyond 6%.
For them to pretend the pain won't be evident until the middle of next year is simply not believable.
Sorry, IMO this is yet another attempt by the banks to get people to fix long. Don't be fooled.
My read is that in 6 months time rates will be between 0.5% and 0.75% less, more if you negotiate hard. And in 12 months it'll be 0.75% to 1.5% less, and could be more given the economy hasn't really been growing for over 12 months now and looks to be shrinking at a faster rate now.
About the only people that should be thinking about fixing longer than 12 months are people in such tight cashflow positions that every cent counts. If they choose longer, they should be certain about the penalty fees for breaking a fixed mortgage.
And by the way, most NZ bank's break fees are based on total nonsense. In the US for example, break fees if you move to another bank are about two months interest, often less, as that is all it takes for the banks to relend the money you've repaid. Most would prefer you to stay with them so the break fees can be waived in certain situations. If your bank is gouging on break fees, lose them and ask the new bank to soften the blow.
Wouldn't hoodwinking customers to fix long on high rates, in a scenario where they foresee a significant economic contraction on the very near horizon be against the banks best interest?
When people start losing jobs, they are going to be less likely to be able to beg/borrow/steel to keep paying at the higher mortgage rate. Leading to more mortgagee sales. Leading to greater falls in property value. Leading to greater losses for the banks.
Surely that is the absolute last thing the banks want..?
Actually the banks are just as likely to grant the distressed party a multi-month repayment holiday or interest free period and just add years on to your mortgage and tens of thousands or hundreds of thousands on top of the total repayment that you make. They always win in the end.
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