ANZ's latest update to their OCR forecast track has moved interest rate markets.
ANZ now thinks the RBNZ will go hard countering rising inflationary pressures by raising the OCR by +50 bps on April 13, and by another +50 bps on May 25, 2022. That will take the OCR up a full +1.0% in just the next eleven weeks to 2.0%. The details of ANZ's opinion change are here.
Markets respect ANZ's opinion.
Interest rate markets hadn't assumed such a sharp, quick double rise. After the ANZ opinion release, they bid up wholesale swap rates, the key rates that drive fixed home loan rates.
Daily swap rates
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If these shifts higher hold, then it is likely that home loan rate cards will rise.
When the OCR was at 1.0%, the one year fixed rate was about 3.85%. The two year fixed rate was about 4.35%.
The immediate impact of the changed ANZ opinion was to add +14 bps to an already rising one year swap rate, taking it to 2.44% and its highest since March 2016. In March 2016 the average big bank one year mortgage rate was 4.37%.
The latest ANZ opinion added +13 bps to the two year swap rate, taking it to 2.91%, its highest since July 2015. In July 2015 the two year fixed mortgage rate was 4.79%.
If there were no more wholesale rate changes, that would add +60 bps to the one year rate and +40 bps to the two year rate cards.
But the chances are that if the markets become convinced the RBNZ is serious about fighting inflation and there is a +100 bps rate in the next 76 days, those rates will go much higher. We need to watch out for market conviction levels. The next week or two will set the tone.
It is not out of the question of getting 100+ bps rises between now and May.
Inflation expectations need to be fought. But with so much of the latest impetus coming from the tradables sector, the pressure on the local economy will be high. And this current local economy is not in great shape at present. On the surface it is running ok but many private firms are in brittle shape, especially SMEs. No pressure release looks like it is coming for households in the form of tax relief, even though the tax take is running at record levels. In fact, there seems little appetite for lower taxes among many voters; they appear to want larger transfer payments instead.
Sharply higher home loan payments will eat away at household budgets. The first, immediate pressure is on commuting costs from leaping petrol prices. Food prices are an immediate pressure point too. But the expectation that the next mortgage rate rollover will bite hard will loom large in home-owning household decision-making.
A 100 bps mortgage rate rise will take $62 per week out of spending for a $450,000 mortgage. It will take $140 per week out for a $1 mln mortgage. At either level any household will notice it especially as it will be on top of petrol and food increases.
Sharp belt-tightening will induce lower demand (which is what an OCR increase is all about), but in the current situation if could easily also bring on recession. Certainly, housing sellers won't find as many buyers. Meeting the market will likely mean lower house prices in the lower quartile markets. Diving auction success results show that pressure is already upon us.
If the RBNZ moves as ANZ expects, the advantage of being a borrower will fade. The disadvantage of being a saver however may not be as great, as the tables turn.
If the RBNZ puts off tackling the building inflationary impulse, financial markets are unlikely to be respectful of that decision. That disrespect may not show up only in wholesale rates, but in the exchange rate as well, exacerbating inflationary pressures. After all, with persistent current account deficits, foreign creditors have an outsized say in these settings.
31 Comments
It's my understanding that inflation was already an issue in the 1970's and the oil shocks ('73 and '79) were added factors rather than the trigger. Numerous factors caused the inflation/stagflation of the time, but ultimately globalisation, energy demand and monetary policy were all causes.
The battle against inflation waged throughout the '70's and the real war started in '79 peaking in '81, at least in the US. The '90's appear relatively stable. The past two decades seem to be a battle against deflation caused by financial shocks rather than "deflationary" forces of globalisation. The expansion of energy supply allowed globalisation to shift it's production base to China, which I suggest has simply limited inflation until now. More "investment" in financial speculation has also limited inflation until now.
It would appear that energy demands, debt, economic growth and monetary policy have all hit their limits. We can continue applying the same policies which would suggest a big interest rate hike and recession, but I don't see how we "expand" our way out of it this time around.
https://en.wikipedia.org/wiki/Nixon_shock
https://www.investopedia.com/articles/economics/09/1970s-great-inflatio…
https://www.federalreservehistory.org/essays/oil-shock-of-1978-79
It was globalisation that created the deflationary forces we witnessed in NZ the last 30 years...yet we spent all that time dropping the OCR to zero to combat that.
But if the shoe is on the other foot (rising inflation caused externally), then the strategy isn't sound?
Yes they can, or at least blunted. A substantial raise in the exchange rate vs US$ will mean comparatively cheaper oil arriving on our shores.
Actually, sorry, fuel not oil, since Marsden has been idiotically stopped from producing fuel from crude, which is an impending disaster. Such an amateur hour decision from our government who doesn't seem to understand that fuel refineries will become key infrastructure in any hot war, with previously signed contracts becoming worthless as they get nationalised or taken over for military purposes. Would force us to take sides instead of having an independent policy in any hot war so we could keep our trucks/cars/trains/boats going.
I believe this fuse was lit a long time ago; just the spark is now coming awfully close to the pile of explosives.
We relied on a bunch of foreign-owned fuel importers to decide the fate of NZ's energy security for the foreseeable future.
And to top it all off, the idiots in charge want us to have undying faith in a piece of paper printed elsewhere in the world that says our "strategic reserves" will be sitting for us in times of crisis. That is if we can find enough tankers to replenish our pumps on time.
I appreciate the view but the OCR should mitigate all inflation and is not targeted at inflation generated by specific input items rising in price. So yes it will not affect the oil price. However if people are borrowing money to spend they will borrow and spend less so inflation across all items will be impacted and should drop.
And to be contrary any interest rates 5 6 7% lower than the prevailing inflation rate, will have little real effect. People will borrow to spend now because they are saving relative to any future prices. The OCR should be at least 5%. Any talk about raising below this is purely lip service to solving the problem by politicized rb employees that have already lost the inflation fight and are trying to hang on to their jobs. This takes us further down the road to the inevitable currency smash that forces rates up multiple percent as an emergency action.
If the RBNZ puts off tackling the building inflationary impulse, financial markets are unlikely to be respectful of that decision. That disrespect may not show up only in wholesale rates, but in the exchange rate as well, exacerbating inflationary pressures. After all, with persistent current account deficits, foreign creditors have an outsized say in these settings.
I also believe this is the reason that RBNZ will have to hike up rates more to tackle inflation. They have no choice. I believe the current goal for them is to prevent inflation to get worse, like it is said in the article, if our exchange rate is not doing well, it is going to exacerbate inflationary pressure.
is going to be interesting, indeed :D
Term 30 years
interest rate = 5.5
repayment = 1309
loan amount 1000000
Refixing previous =>
interest rate = 6.5
new repayment = 1458
loan amount 1000000
New loan =>
interest rate = 6.5
repayment = 1309
loan amount 898000 <= amount you can borrow with same repayment
1000000 - 898000 = 102000 = -10.2%
My view is that RBNZ does not ( will not ) have to raise rates much.
I suspect NZ is already in a downturn..
Most of the credit growth is in housing, which has already turned down.
( My view is that Banks will carefully manage mortgagee sales, and mortgagee stress in a similar way they managed the farming sector when it had its big downturn )
Construction is boom/bust, kinda cyclical..... That cant be far from turning down.
RBNZ will drag its feet on inflation.. They only seem to take a heavy hand when we have strong wage/income inflation ... ie. people striking for higher wages etc.
The whole inflation targeting policy framework methodology has been shown to be badly flawed.... in my view.
30 yrs of profoundly excessive credit growth , around the world, is not going to be undone easily.
My best guess, is that in the face of a recession Central Banks will ease again ...and we might get one more, kinda, reflation.... ( In NZ at least ). Add in Govts. new love for fiscal deficits.... and it seems like we might only get a down turn or recession that we will stimulate our way out of. ( I dont think our leaders are smart/wise enuf to know any different ).
They will blame everything on overseas causes, which is out of their control...etc..
I'm guessing that Adrian Orr might be regretting some of his 2020 covid response decisions..??
There are two sides to this - domestic, and international. Internationally the Fed's next moves will have a massive influence on the magnitude of OCR changes coming in NZ and the driver of those is inflation and Ukraine. Currency valuation is key.
Domestically the reasons to raise the OCR is to change spending behaviour, and this usually occurs to defend essential purchases.
Business confidence, credit tightening, and prices at the pump are already having a large impact on our behaviour - this is clearly seen in the changes in the property market. So, if the domestic drivers are already largely being met, then the Fed becomes the largest remaining influence.
Thats because anything below inflation is a win. And at these low numbers, as you pointed out you can get very high percentage gains which are still insignificant in the real world, 1.6% is 16,000 E a year on a 1,000,000 loan. And that gets down below 10,000 at 600,000.
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