Kiwibank economists are saying the Reserve Bank (RBNZ) is planning to take the Official Cash Rate (OCR) too high.
"The RBNZ are hell-bent on forcing inflation back within its mandated 1-to-3% year-on-year target band. And fair enough, their credibility as an inflation-fighter is being tested," Kiwibank's chief economist Jarrod Kerr, senior economist Jeremy Couchman and economist Mary Jo Vergara say in Kiwibank's latest Our Take publication.
"They expect the OCR to hit 5.5% in order to achieve the required economic slowdown. We think a move beyond 5% is a step too far. What the RBNZ will do (hike to 5.5%), is beyond what we think the RBNZ should do. We place a much larger weight on the global slowdown, higher interest rates are effective, and Kiwi are feeling the pinch now," the economists say.
They describe the RBNZ as being "extreme" and say that "seemingly at odds with international developments", it has upped the ante.
"We find ourselves factoring in what the RBNZ is doggedly determined to deliver, and it is likely to be too much.
"We’re worried about the impact on Kiwi households and businesses.
"The RBNZ’s forecast recession could easily turn into another economic accident.
"First there was too much easing, and now there is too much tightening," the economists say.
They say the housing market appears to have borne the brunt of the tightening in credit conditions to date.
"Sales activity has fallen sharply, and the supply of listed housing has risen to surpass pre-covid levels.
"Across Aotearoa, house prices were down 11% year on year in October and have fallen 12% from the peak. Prices have fallen back to levels seen at the start of 2021.
"Unfortunately, house price declines have further to run.
"The RBNZ’s desire to quickly hike the cash rate to 5.5%, with a 75bp move in February on the cards, has already seen mortgage rates take another leg higher.
"Higher mortgage rates will weigh on the market over summer. We are still expecting house prices to be 13% lower in the final quarter of 2022 compared to a year earlier.
"However, annual house price declines are expected to reach 15% in the first quarter of next year.
"The deeper fall now means our new forecast represents a 21% drop from peak to trough and take prices back to levels seen in late 2020."
On the economy in general, the Kiwibank economists say they are starting to see a softening in spending already.
"Our spending tracker showed a third of the categories we monitor dropped in the volume of transactions made over the September quarter; and all were concentrated within discretionary spending. We expect this to continue. Residential property investment is also under pressure. Construction has helped the economy power through the Covid lockdowns. But as residential construction quietens down, Kiwi economic activity will slow.
"The sheer weight of rising interest rates is set to push the economy into recession from the middle of next year. We are forecasting a three-quarter contraction in activity from the June quarter to leave the economy 0.7% smaller at the end of 2023."
The economists say their "central scenario" (core view), is that interest rates will hold near current levels into 2023, and then decline over the year ahead.
"We expect central bank tightening to run its course over the next six months. Markets will position for the next move, of course, being rate cuts. The persistence of inflation, and the need for central banks to see a sharp deceleration in price pressure, is likely to mean cash rates may hold for a while.
"We suspect the tide is already turning, and central banks will be in a position to ease monetary policy by the end of 2023.
"We see wholesale rates declining over the year ahead. The 2-year swap rate is likely to start 2023 over 5%, but end the year around 4.4-4.5% (that’s a full 100bps off the recent highs). Interest rate curves are likely to remain deeply inverted, with long-end rates factoring in much lower growth and inflation rates.
"We are then likely to see a sharp bull-steepening in interest rate curves as rate cuts are ultimately delivered."
They say, given the balance of risks, "with downside risks significantly outweighing upside risks", positioning for lower interest rates and a lower currency "makes sense".
78 Comments
by HW2 | 7th Dec 22, 12:07pm 1670368047
If Orr were a horse he would running down the back straight right now and heading for the finish line. The trouble, is that the race finished two laps/hikes ago and his heavy blinkers stopped him seeing what was actually happening.
But unfortunately he's spent the hours before the race loading the horses up with performance enhancing drugs so they are now completely out of control and can't be kept under control, let alone stopped in an orderly manner.
The horse may now need to be shot for everyone's safety.
Such a biased value judgement they make there isn't it...but utterly unclear on 'unfortunate' in what sense. They don't think good for the country's long-term economic wellbeing or medium-term financial stability? Or are they just worried about their bottom line? Perhaps they feel empathy for the segment of over-leveraged investors and/or recent FHBs?
Pretty bad comms actually.
You seem to be under the impression they get a choice. If the Hospo and Supermarket workers get large increases awarded then thats it, those businesses will have to pay, and pass the costs on to their customers. Supermarkets aren't going to shut down, a few hospo businesses will, but most will just have to roll the cost increase into the menu prices.
First they trap everyone under the bus with huge debt, and now they are driving the interest rate bus running all over those under the bus
I prefer to take responsibility for my own life, no one forced me to take on debt, it's my choice. If it turns out well, I'll enjoy the benefits, if it doesn't, I'll accept to pay the price.
Yes, and the stove is also hot when it's turned on. Are we done playing correct and obvious points that have little to do with what I'm actually saying?
Fetishising individual responsibility to the extent you think it can somehow mitigate huge cross-institutional failure is how we got into this mess. I'd prefer to not perpetuate that and be part of the problem. Each to their own.
Agree there GV - and this has been part of my argument on here for many years. People want benefits/gains (e.g. housing capital gains) but they don't want anything to do with the wider harm it causes society as a whole. We need to take equal amount of social responsibility as we do self responsibility (both are important).
Yvil (sorry for bringing this up again but the example is too good) claims to have made $1,000,000 in the housing market (untaxed). Now people can't afford to house themselves.
Yvil now gets to double dip as he also owns motels, so now he gets paid by the government (after not paying any tax on his capital gains) to house those homeless people who are a victim of that broken housing market - of which Yvil has already been a massive beneficiary.
Yvil may now look down on people getting government support 'called beneficiaries' as not taking 'self responsibility' and yet he is possibly in the group of the biggest beneficiaries in the country in recent history.
Its a broken system - and in which people completely are unaware of the benefits they personally are deriving from it, the harm that gain is doing to others, and how it is going to result in financial and social problems in the future. i.e. it is making the country as a whole worse, not better.
We live in an interdependent society, so people who claim I only need to take self responsibility often haven't fully matured yet in their views and understand of how we as people are reliant on doing the right thing by one another. If we want to live in a healthy and cooperative (and financially stable nation - or world....) then we also need to take just as much social responsibility as we do self responsibility.
I'm not criticising the work you do Yvil - you run motels...good for you. And I think it is good that you're helping those homeless people.
But if you want to claim that you're only responsible to yourself, and yet the government (other tax payers) is what is keeping your business above water at present, then I am critising your lack of self awareness (and not your trade). You are reliant on the state to fund the motel, just as the homeless people you are housing are. Both beneficiaries of the tax payer.
In terms of your work question - I have no intention of giving away my personal occupation (this is an anonymous site).
If I say nothing your argument then will be to claim I'm a dole bludger (incorrect).
If I say I do, you ask - what do you do? (which I don't want to tell you - you might know who I am! so again I do not wish to answer this)
You're quick to judge what you don't know IO. The Motel was a terrible investment over which I almost lost everything including my house, 16 years ago. I had to rebuild the business up from nothing in an indusrty I knew nothing about and owing a 6 figure sum due to a crook cheating me. Then Covid happened, no tourist no one travelling. How do you think a motel works with no bums on beds? So I got busy, contacted MSD to provide emergency accommodation so we could survive.
That's how I got so lucky!
by Yvil | 7th Dec 22, 12:09pm 1670368162
I'm not arrogant enough to pretend I can fix the issues of our nation, I'm just trying to make a living for my family.
Yes by receiving funding from the government to house homeless people and then arguing that you are only responsible to yourself. And yet it is other tax payers that are now paying for your motel. Making you also a beneficiary who is reliant on the state.
By far the biggest problem I have with Yvil is not that he owns a motel and he’s effectively relied on government support. In and of itself, while it is a very sad indictment of our society, it’s fair enough - motels struggled during covid, and we have a disgraceful homelessness problem.
Rather it’s the total hypocrisy he has demonstrated over the years.
ie. bashing beneficiaries and the government who supports the beneficiaries, but then very happy for his business to be propped up by those same beneficiaries and government.
I won’t beat around the bush here - I think it’s disgusting.
HM, another way to look at it: I don't know what you do for a living, I suppose you work? Does it really make a difference if your customer is a business, private company or the government? Do you also think that the poor sods who empty your rubbish bins are horrible people because they get paid by the government or councils?
I'm not entirely sure what your point is here. I don't a have huge amount of my identity tied up in thinking that making money off residential real estate because I was born at a certain time makes me some sort of Warren Buffet-level financial genius, so I'm quite happy to be frank about the huge social costs that comes with normalising the flow-on effects on front-loading young people with huge amounts of debt for starter homes that they'll struggle to pay down, even with two full time careers of working salary/wages.
It's not a case of it not being too simple, it's just a case of being irrelevant to the points I'm making, or their validity. I'm not quite sure how it could possibly matter to you anyway, other than fulfilling some sort of overly defensive need for a 'gotcha' moment.
OK, since you say you truely don't understand my point, I have no choice but to explain it more clearly:
You are not happy with your situation, so you complain about it (fair enough) and you blame others for your situation. My point is that blaming others for your situation will not make your situation better. I suppose you're still young, may I offer a piece of advice; replace all the time you spend blaming others with looking at ways you can improve your own situation. If you do this consistently your life will improve immensely.
Look I'm starting to think you're actually the one that isn't playing with a full deck when it comes to the reading comprehension game.
I understand what you're getting it. It's just not that smart, it isn't insightful and adds little to the other points I've actually been making.
And no, you may not 'offer advice'. If it's based on the same logic that is trying to normalise our current market situation or think that addressing the issues that led us here is a 'blame' game then I'm going to go out on a limb and assume it's probably not that well informed, thanks all the same. Might I suggest you not take things so personally? After all, you might live longer.
Many people forget the times when speculators and investors were making huge profits off housing now like you have acknowledged Yvil the pendulum has swung and people who did not see this downturn coming and we’re caught up with cheap money and FOMO will pay the cost for a long time.
At the domestic level: If the source of inflation is supply and not demand, then what is the purpose of raising interest rates, especially since the US Federal Reserve is aware, as stated by many of its officials, that its measures will lead to an economic recession. Why insist on such measures even though they did not save the US economy from further increase in inflation rates?
MH: Blaming today’s price inflation on workers earning too much is simply an excuse to impose a new class war against labor. It is obvious that wage levels did not force up prices for oil, gas, fertilizer and grain. These price rises are the result of U.S. sanctions. But the central claim of today’s neoliberal economic orthodoxy is that all problems are caused by labor being too greedy, and putting its own living standards above the ideal of creating a wealthy rentier class to lord it over them.
The aim of cutting back credit is to reduce employment by bringing on a new recession, there by rolling wages back – and also making working conditions much harsher, blocking labor unionization, and cutting back public programs on social spending. The economy is to be Thatcherized – all by riding the crest of the American anti-Russian sanctions and claiming that this creates a crisis requiring dismantling of public infrastructure and its privatization and financialization.
Of the recent FHBs I've talked to, only 1 in 4 knew what the current interest rates where. The rest all fell into the "I only need to know when it's time to refix" camp. All of them so far are refixing in the next six months.
E.g.: I was talking to someone yesterday who was happy house prices were dropping, and were considering leveraging their equity in their home to purchase a rental.
But they didn't know what the current interest rates are, or that their existing home loan will cost them an extra (we did a gross calculation) $300 per week when they refix in January.
Yes and kiwibank's business is primarily lending for housing and as a Crown owned entity they are conflicted - do they allow their clients to be sold up when they should or delay the inevitable and make it even worse by rejigging/ refinancing so the Crown looks good as a supportive "partner"
Is it going to be Fannie Mae or a BNZ crash a la 1990
NZ housing market won't collapse big time since our banks haven't been lending to the big debt fueled "developments" of the ludicrous scale we see overseas. Our banks in comparison are quite responsible in who they've been lending to. We aren't a thousands of empty apartments country.
Returning to 2 year ago prices isn't a big deal.
Kiwibank's chief economist Jarrod Kerr, senior economist Jeremy Couchman and economist Mary Jo Vergara say:
"The RBNZ are hell-bent on forcing inflation back within its mandated 1-to-3% year-on-year target ban"
Did they not see the original memo when RBNZ was set up... the RBNZ target is to keep inflation in its mandated target
I really cant see what the rest of their article is wittering on about.... sounds like a load of whining about how unfair it is for people who took massive loans at low interest rates and didnt consider the possibility rates would rise again. And banks that took too much lending risk and who are now as well as needing to manage that risk are finding it hard to meet their ever increasing sales targets. To counter this argue\ment there were more of us that did understand the RBNZ KPI's, who consider the ever increasing possibilty rates could rise, who didnt take out the huge loans (as we didnt believe it was worth the risk), who didnt choose make the mega bucks and who dont really have much sympathy for those that did. And we want the RBNZ to stick to its mandate and keep inflation in check so we can continue to live a healthy lifestyle with affordable daily use products like food.
Gambling on property (like roulette) has winners, and losers. For lenders and borrowers. The rules of the game dont change when people start to lose.
Really? Because the rules sure seemed to change a lot for a while there.
Getting real tired of the finger-wagging from the 'we knew better' crowd given the absolute huge amount of institutional, political and reputation effort that got put into de-risking property for a period, generally at the expense of people who didn't already own any.
Like sure, if you just totally ignore the multi-billion dollar stimulus, then... I guess?
Totally agree that the rules changed a lot for a while there. The RBNZ were moving every goal post. Pulling every lever. They made property look like a one way bet.
The mortgage holidays, the lvr removal, the loosening of restrictions, the FLP, the very low OCR, the hyping of negative rates.
We shouldn't be blaming anybody for getting sucked in by it all. It was central banker smoke and mirrors and strobe lights and chicanery on an unprecedented scale.
Back in 2020 and 2021, it was commonly accepted "wisdom" that the RBNZ + government would never "let" the property market fail.
Gosh that’s interesting “ever increasing sales targets” for loans in banking. Im surprised, would have thought that banking was no different to farming or the likes where you take the good years with the bad. The smart farmers put aside good returns from bumper years, knowing soon enough snow, storms or drought will bring the need to tighten belts. Maybe it’s going to have to be a bit lower bank shareholder dividend in the few years?
I believe some kind soul here posted this yt link about the Irish property crash:
https://www.youtube.com/watch?v=FtbMAPcZ0Q0&t=112s
I feel like we are in a replay.
I am working on the assumption that both house prices and stock markets will return to 2019 levels, as they rightfully should. What happened over the last 2-3 years was simply insane. Hopefully both will drop even further as there was still significant excess in the system from the post GFC response that never got removed. Recessions are a natural part of the economic cycle, and this whole "kick the can" game central banks have been playing since 2000 has to stop.
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