Economists at the country's largest bank now see the Reserve Bank beginning to hike interest rates from the middle of next year.
And the ANZ economists are forecasting that the Official Cash Rate will be 1.25% by the end of 2023. That compares with an OCR of just 0.25% at the moment.
(David Hargreaves comments: Such moves if they occurred would clearly have ramifications for mortgage holders in particular. And especially those who may recently have bought into the hot market with large mortgages. And remember, not long ago we were expecting negative interest rates this year.)
In a preview of the latest Reserve Bank Monetary Policy Review to be released on Wednesday, May 26, ANZ's chief economist Sharon Zollner and senior strategist David Croy are forecasting a first OCR rise in August next year, followed by another one later in the year, leaving the OCR at 0.75% by the end of 2022. There would then be a further two rate rises in 2023.
"We expect the RBNZ will continue to strike a cautious tone and stress that considerable monetary stimulus remains appropriate and is expected to remain so for quite some time yet while the dust settles and the true economic picture becomes clearer. There’s still a lot of uncertainty out there, absolutely. But there is no question that the picture is evolving and that it is getting harder to argue that super-stimulatory monetary policy is the medicine that the economy needs for a prolonged period," they say.
The OCR has been at 0.25% since it was cut in March 2020 in response to the fast emerging Covid crisis.
Inflation under every stone
Zollner and Croy say inflation can now be seen "under every stone".
"How should one think about the inflation pressure we are seeing at present? It’s a global question, not just one for the RBNZ.
"At face value, it’s cost-push and transitory. Global shipping will sort itself out eventually as demand and inventories normalise, and freight rates will fall sharply. High commodity prices will bring about more supply. The minimum wage hike will work its way through, and gradually increasing labour supply as the border inches open will relieve some pressure.
"However, inflation pressures are massive and broad-based, as reflected in our ANZ Business Outlook survey. Both costs and pricing intentions have accelerated rapidly, with the latter the highest since the data began in 1992."
Zollner and Croy are strongly suggesting that the RBNZ should reintroduce its OCR forecast 'track' into its Monetary Policy Statements. The central bank dropped these last year after it cut the OCR - and pledged to keep it unchanged till at least March of this year.
"The RBNZ no longer has a reason to not publish such a track – banks are now ready for a negative OCR, and the 12-month unchanged-OCR forward guidance has run out," the economists say.
"We could certainly understand that there might be some reluctance on the part of the RBNZ to resume publishing an OCR track. A completely flat track out multiple years would be stretching credibility, but a whiff of hikes might result in what the RBNZ would deem an overreaction in markets.
"However, the OCR track is a key part of the RBNZ’s projections, and indeed has been a key source of pride over the years, regarding the transparency of policymaking.
Picking a 'lift off' date difficult
"The market has not forgotten how to interpret it. It understands that it is a helpfully clear signal of how the RBNZ is seeing the world here and now; it’s subject to change just like the rest of the projections, and not a promise or a commitment."
Zollner and Croy say picking an exact date for "OCR lift-off" is exceptionally challenging at present.
"As well as the usual forecast uncertainty (at the very least), it is difficult to know how the RBNZ will respond to an unprecedented situation.
"Capacity constraints are clearly biting hard now, but the economy’s speed limit will increase once the border opens wider and supply disruptions ease. When this will occur is highly uncertain, but it may happen precisely as demand weakens as unsustainable growth drivers fade, making for a double whammy.
"Our August 2022 start allows time for the situation to become clearer, and for the worst of the supply constraints to work their way through.
"We think the RBNZ will take a cautious approach consistent with its “least regrets” strategy, waiting longer than normal to hike in the face of clear and present inflation pressures."
The economists say that by August 2022 the RBNZ's large scale asset purchase (LSAP) programme is likely to have concluded (although the rollover of coupons and maturing principal will likely continue for some years beyond that).
"At the same time, the RBNZ will not have forgotten the lesson of the 1990s, which was that kicking off a hiking cycle too late makes engineering a soft landing more difficult, and generates what the RBNZ might consider ‘unnecessary volatility’.
'Soft landing not easy'
"With house prices and household debt where they are, a soft landing is not going to be easy to achieve no matter what, let’s be honest, but best endeavours and all that.
"While the RBNZ will set policy for what it believes is appropriate for the New Zealand economy, it is reasonable to ask the question whether the RBNZ would be willing to embark on OCR hikes well before the US Federal Reserve or the Reserve Bank of Australia.
"In practice, this will depend on a number of factors, including whether the NZD is doing its number one job of following New Zealand’s commodity prices, as opposed to market fashions and whims (it’s been impeccably behaved so far). The RBNZ will take the exchange rate at the time into account, along with an estimate of the likely impact should the RBNZ hike out of sync with other central banks.
"But in the end, if the RBNZ deems that monetary conditions need to be tightened, it’s likely not unreasonable for a stronger NZD to be part of that mix.
"For now, we’ve scheduled a very gentle, cautious hiking cycle beyond the initial kick-off, quickly unwinding the Covid-specific cuts but then feeling the way cautiously. There’s obviously huge uncertainty when forecasting rate hikes so far ahead, with any forecast track more a stake in the ground regarding the balance of risks than a precisely calibrated firm expectation."
53 Comments
Inflation has not met target of 2% for over a year. Not much to address:
https://www.stats.govt.nz/indicators/consumers-price-index-cpi?gclid=Cj…
Its the script for a perfect storm - lock in as many FHB's at extroadinary prices/debt levels then start the squeeze of rising interest rates.
As long as wages rise at the same rate as inflation...no problem...but can all businesses pass on higher wages to staff if all their input costs are rising as well - it could become a very nasty feedback loop. If they do, it will create more inflation, which the RBNZ will then need to battle by raising interest rates, which get passed to mortgages, which means staff need higher wages, which mean businesses put up prices even higher, which raises inflation, which the RBNZ will then need to battle..(and so on and so forth..)
And doesn't this just give you warm fuzzies:
"With house prices and household debt where they are, a soft landing is not going to be easy to achieve no matter what, let’s be honest, but best endeavours and all that."
Economists at the country's largest bank now see an Official Cash Rate of just 1.25% by the end of 2023 - compared with just 0.25% now. Either figure will see the credit spigot continue to be turned wide open, the easy money continue to flow, and debt continue to grow unabated.
No because buyer behaviour isn't logical, people are not little Dr Spocks running around with calculators deciding what to bid on a property based on interest rates. FOMO seems to rise quicker and get baked in to prices, wheras a downturn takes a bit of time to start to unwind and then gets faster towards the end
Listened to a Peter Schiff podcast last night (not a regular follower of his but...) - he's adamant that we're going to see significant inflation the next 12 months and that the Fed aren't going to be able to control it. He says he's just as confident about this as he was about the Fed denying the mortgage issues present in the US prior to the GFC (which of course he was correct).
Obviously with too much time over the weekend , I plotted the RBNZ M14 2 year forward inflation forecast data against the actual annual CPI data . Thankfully CPI data is not revised and both sets are available back to 1988. Although the M14 data is the average of the respondents , anyone believing that ANZ or any other economics team can with some accuracy plot the course of inflation over the coming two years should be employing a pair of well fed baboons to provide forecasts.
Well if inflation shows up we’ll see. Central banks could well have their hands forced to raise rates and higher than expected. To think keeping a few FHBs solvent in their recent oversized mortgage is more important than avoiding hyperinflation or unacceptably high inflation, mortgage belt might need to rethink his/her position. Cannon fodder comes to mind.
If inflation really comes back seriously Central Banks will be between a rock and a hard place and frankly things won't be pretty. The OCR can rise a little, no problem but I don't think it can go to 5% as you suggest in a post above because if it did, with retail interest rates at 7% there would be so many insolvent borrowers that it would not be small collateral damage. Before losing one's house people would tighten their belts to the extreme which means countless businesses would go bust, this in turn means many people would lose their jobs which of course makes it harder to pay rent or a mortgage. If/when serious inflation arrives, we're all f****ed,
Choice 1) keep interest rates lowish and get runaway inflation = we're f…ed
Option 2) raise interest rates aggressively and face a serious depression that will make Covid look like a walk in the park, we're f….
Yeah, that's why the best option is to be proactive and start rising it slowly, like Orr always says, "act fast and don't wait", it will be a bit painful but wont be a crash. People need to learn that interest rate is not going to be low forever. They need to learn to manage their debts to a reasonable level.
Im sorry but when have economists been right, never they keep getting it wrong and this is another. The OCR has to stay low because the OCR is the interest rate for the government debt. Any increase at present or in the near future will add more interest to their already growing debt. I cant see that happening anytime soon especially when they are still printing money.
That's why this is forecast from economist. They are printing money now doesn't mean they will continue to print money tomorrow. Also because they are still printing money, that's why the economist is forecasting about inflation and interest hike problems. Of course, it's not guaranteed to be accurate. But a smart investor will look into this and start making their decisions based on this.
With all the QE around the world, Inflation is going to hit eveything from brocolli to houses..... and there will be no way central banks will rise rates. This will create massive problems, and crash economies. There is nothing they can do quite simply! I can see Jacinda raising minimun wage another $1/hr within 12months.
When talking about rates and housing that Soros idea of "Reflexity" comes to mind.
For 15+ years households have foregone consumer spending to 'invest' into property on the assumption that CPI inflation and the OCR would stay low so assets would appreciate. CPI and the OCR did stay low as a result of spending being directed at property assets. It's actually become quite a strong feedback loop within our economy through positive reinforcement with house prices indexes far exceeding other assets, goods and services.
If that loop is now broken we might see households spending directed at other things (e.g. retail purchasing). It's possible that, for some period, increasing rates may actually have the unintended consequence of increase inflation rather than decreasing it.
The only note of caution I would give is that what I've said ignores the supply side constraints placed on housing. It's clear to me this loop wouldn't have lasted as long without inflexible zoning laws and economic incentives that pushed councils to not increase available land to match population growth.
We have emergency interest rate settings, with no emergency. RBNZ needs to stop its QE immediately and signal some sort of path away from zero interest rates by the end of THIS year, providing no new shocks.
This cringeworthy "talking down" of the economy every time there is an RBNZ meeting is well past tiresome. Anyone can see that they're just struggling to manufacture reasons to keep monetary policy ultra easy, for the benefit of vested interests.
Very well said and so true. One of the best posts.
The OCR should be brought back to 1% at the next review, and a path of progressive increases clearly signaled by the RBNZ. Not doing it would be dereliction of duty - it is better to induce some pain now than much deeper pain later on. Better to try a soft landing now, than being forced later on to witness a hard landing. Unfortunately, the NZ housing Ponzi is in such a fragile state that this is not going to be easy.
All this "something for nothing" mindset that has plagued our country for decades is about to be reversed and will be assisted by OCR increases within the next year. How can the same stupid house on the same stupid street be supposedly worth a few hundred percent more than it was a decade ago ? It is simply insane monetary policy that the "reverse bank of New Zealand" has been playing with for the detriment of our society. Houses are not productive assets or a critical part of our economy especially with no migration for the next several years.
Yip, the same average kiwi house on the same street is now worth $200,000 more than it was this time last year - yet household take home pay has gone nowhere over the same period with the risk of rising interest rates in the future and higher servicing costs on the debt that has allowed those price rises to occur. Its stealing from the future.
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