The head of one of the country's largest mortgage brokers has written an open letter to Reserve Bank (RBNZ) Governor Adrian Orr urging him to hold fire and NOT hike the Official Cash Rate (OCR) again.
The RBNZ's widely expected to increase the OCR again on Wednesday by at least 25 basis points to 5.5%. Economists reckon there's even a chance it might be a 50 point hike.
But David Cunningham, CEO of mortgage broker Squirrel, and a former CEO of The Co-operative Bank, is warning that "households are in for a WORLD OF PAIN". Cunningham has previously strongly expressed an opinion that the OCR should not go up again this week.
But now he's gone further with a lengthy letter to the RBNZ Governor in which he says that raising the OCR further "is the last thing the Reserve Bank should do right now".
He says the average mortgage rate Kiwis are paying today is 4.40% - up from a low of 3.20% just over a year ago.
"A lot of households have only managed to make up that added cost thanks to repayment buffers they’d built up whilst interest rates were low.," he says.
"Now, even if the OCR is held at current levels, the average mortgage rate Kiwi are paying is going to rise to 5.90% over the next year, as more people roll off lower fixed mortgage rates to higher levels. That’s another 1.50% to find on top of where we are now, and with repayment buffers much narrower.
"Households are in for a WORLD OF PAIN. In short, monetary policy is on a steep tightening cycle for another year. Kiwi don’t need the screws tightened further via more interest rates hikes. Kiwi need someone to cut them a break."
Cunningham makes arguments that migration actually helps the RBNZ's inflation fight, while last week's Budget "is actually good news" for inflation.
"In short, my view is that the surge in migrants will see unemployment rise – but it won’t take Kiwi losing jobs (as was the Reserve Bank’s original plan). Rather it’ll happen as a result of a bigger labour supply, which will be a drag on inflation," Cunningham says.
On the Budget, Cunningham points out that according to Treasury forecasts, inflation has already begun moderating and will fall to 4.5% by the end of 2023 be back inside the RBNZ's target band of 1%-3% inflation by late-2024.
He says that while some might argue there’s cause for concern in the fact that wholesale interest rates have shifted upwards over the last week – perhaps suggesting that inflation isn’t quite under control yet – "in my opinion that shift is inconsistent with underlying economic factors".
"In fact, I’d suggest the rises are being driven by financial markets participants. After all, who benefits most from financial market volatility, if not the financial market traders?
"What would I do? I’d hold the OCR at 5.25%, but make it clear that this rate is unlikely to be lowered during 2023. That will ensure the tightening monetary conditions for households are delivered, and see wholesale interest rates revert to the level they were after the April OCR review.
"PATIENCE is what’s needed here – and I know the Reserve Bank has it in spades. I believe it’s now time for you to watch, worry and wait rather than throwing more fire-power at the inflationary dragon. A dragon that (many signs would suggest) is already on death’s door.
"Governor Orr: Don’t kill the economy, and inflict even more pain on top of what’s already coming for Kiwi households, just to slay the dragon that little bit faster."
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