Kiwibank economists are still adamant the Official Cash Rate will be cut in the first half of next year - despite the Reserve Bank indicating now that there's no cuts likely till early 2025.
The Kiwibank economists - chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado said in the bank's latest First View publication said they had been "surprised" to see the RBNZ push out its forecast track for the OCR when releasing its latest Monetary Policy Statement last week.
"Over the last two MPSs, the RBNZ made two steps forward, by lowering the OCR trajectory in recognition of the cooling economy. Last week’s lift was a giant leap backwards," the economists said.
Having lifted the OCR rapidly from just 0.25% as of the start of October 2021 to 5.5% in May of this year, the RBNZ is now not forecasting cuts to the OCR till the first quarter of 2025.
The Kiwibank economists said the RBNZ "wants the full force of recent tightening to hit households" in coming months.
"Thoughts of rate cuts were deliberately squashed, in order to keep wholesale rates, and therefore mortgage and other lending rates, high and dry," they said.
The economists had previously called for an OCR cut as early as February of next year, but now concede this "looks increasingly unlikely".
"We need to take the RBNZ at their word here. And they’re saying clearly enough, that the time required to see inflation fall back comfortably towards 2% will take a lot longer than our forecasts."
Annual inflation as measured by the Consumers Price Index peaked at 7.3% in mid-2022, but has since started falling only slowly, getting down to 6.0% as of the June quarter this year.
The Kiwibank economists say they have "reluctantly" tweaked their view.
"We still expect the next move to be a rate cut. And we expect a cut long before most commentators and the RBNZ themselves," they said.
"We now pencil in the first cut in May next year. And it’s more to do with direction, rather than precise timing. If the economy develops in line with our forecast, with very weak economic activity and falling inflation, then we should start talking more about rate cuts as we head into next year.
"We believe the RBNZ should be in a position to start cutting interest rates early in 2024. We are firm in our belief that rates should be marked lower in the first half of the year."
In BNZ's latest Eco Pulse publication, BNZ chief economist Mike Jones said despite the RBNZ's "subtle nod" last week to the risk of a higher OCR, "our central view is that it will remain where it is at 5.50% for some time".
"This being so, our messaging on both mortgage rates and house prices hasn’t changed. Notably, the Reserve Bank’s own house price inflation forecasts were given a shunt up towards our own in last week’s statement. We retain a stronger view overall (7% rise over calendar 2024)," he said.
"We think mortgage rates are in the process of peaking, but the timing of any meaningful falls is sufficiently distant (and uncertain) that it makes sense to budget on rates staying around current high levels well into next year."
Jones also said "additional upward tweaks" in mortgage rates can’t be ruled out should the recent "lurch higher" in wholesale interest rates continue.
"Since the Reserve Bank declared the tightening cycle over in May, two-year wholesale (swap) rates have risen a further 40bps [basis points]," he said.
"From early 2024, we should see mortgage rates start to nudge lower assuming our view of mid-year cuts in the Official Cash Rate is close to the truth. Declines are expected to be more pronounced in the shorter-term one- and two-year rates. For this reason, fixing at shorter terms, as appears to be the most popular strategy at present, continues to make sense to us. That’s even with three-year fixed rates being about 70bps lower than average one-year rates."
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Nice concept, that at face value is an accurate theory.
The elephant in the room is inflation, and the fact that inflation doesn't appear to be dropping anytime soon. I can't believe that "qualified economists" would suggest that OCR cuts are on the near-term horizon, when inflation shows zero signs of slowing.
NZ CPI
Dec 2021 5.9%
June 2023 6% (and likely to rise following the return of fuel taxes)
There is a definite downward trend in quarterly CPI since Sep-21, and the last quarter annualised is only 4.4%. https://www.stats.govt.nz/information-releases/consumers-price-index-ju…
The same people that love to say we are in recession due to two negative quarters of GDP data then like to use annual CPI data. Whatever sounds worse is what is chosen...
Annual GDP is currently 2.9%, I doubt that is a good representation of current conditions, neither is the annual CPI of 6.0%
Low second quarter inflation was largely due to lower fuel costs. End of june, price at the pump for 91 was ~$2.30. We're now edging over $3, more to come? Unsure. Also rents have risen, RUC, and food costs through winter. I would not bet on that low annualised figure sticking around for long with some major moves happening this quarter which will roll through the next 6 months or so.
I'm sure the dairy farming sector making a loss (on the back of the milk prices cratering along with Fonterra forecasts) will also add to a weakening of the NZD and a further slowdown in spending. Govt spending anyone?
With sticky inflation - it's important to take in the big picture. Again - I have no idea where inflation will be in 6 month's time. My opinion is the bank economists are jumping the gun.
I think we should stop holding bank Economists in such high regard and giving them such a great platform. A true Economist shop be independent and free of influence which bank Economists are not.
What the bet their real view would only be found out after a beer or two.
And no, I am not an Economist.
I think we should stop holding bank Economists in such high regard and giving them such a great platform. A true Economist shop be independent and free of influence which bank Economists are not.
Yes. Bank economists are more like comms staff. The problem is that everything that they share with the sheeple has the life and DGM sucked out of it so as not to spook the audience.
Basically they're working for the vested interests of their masters.
That cracks me up. My theory on that, is that smart power hungry clergy with no money or hereditary titles would gravitate to the church. They would control people by fear while assuming power and wealth. No bigger church then banks nowadays, using fear to make money. Now this is tongue and cheek. But I see similarities in your comment. But the similarities are scary.
So according to one study from 2018, apparently 3.38% of recessions were predicted correctly by economists (8/153), which is so dismal it's ridiculous. Also that 3.38% doesn't account for false positives - i.e if those 8 economists also incorrectly picked recessions elsewhere. Thus ignoring economists predictions is probably appropriate.
If Kiwibank are wrong that would imply either a very strong NZ economy that is still pumping despite high interest rates and a falling housing market, or stagflation. Personally I don't think stagflation is possible unless it is imported inflation, so unless we get another global inflation event I reckon we can rule that out.
That's because GDP numbers do not reflect actual economic performance and there are many ways policymakers can artificially prop up GDP at the expense of broader economic outcomes.
Mass migration into NZ, bloated fiscal policies, loose monetary settings - we've had a combination of at least 2 of these pushing up GDP for more than a decade now. Clearly, #1 and #2 are still at play here.
BNZ chief economist Mike Jones, " ... fixing at shorter terms, as appears to be the most popular strategy at present, continues to make sense to us."
Mr Jones has just leapt up my rankings of economists worth paying attention too!.
As an aside, just overheard from a "professional forecaster" delivered in somber tones: "We expect interest rates to move somewhere between Westpac's and Kiwibank's predictions." ... I hope the audience wasn't paying for that advice!
This is Jarrod's whole thing though, he believes that rates tend towards zero as populations age. Here he is 5 years ago on the subject on this site: https://www.interest.co.nz/bonds/85722/cbas-director-interest-rate-stra…
However this represents a real rift within economic thinking at the moment and I hold a fundamentally opposed views on this. I think that fundamentally working, the act of producing goods and services, is deflationary while consumption is inflationary. As populations age total aggregate consumption increases across people lifespans (household consumption in working years, then health and aged care in latter years) while employee productivity peaks between 30 and 40 years of age then substantially ceases at retirement.
What people like Jarrod argue is that wage growth is constrained by per capita productivity growth (health and aged care jobs are low productivity growth) but we argue the Baumol effect shows that wages actually constrained by labour supply/demand independent of productivity because in a tight labor market low productivity jobs have to compete with high productivity jobs.
That might explain why KiwiBank has consistently been having a piss and a moan about rates being too high, and suggesting that RBNZ has overcooked their response every step of the way.
Another possible explanation is the vested interested aspect, here's Jarrod saying he owns multiple investment properties - https://www.oneroof.co.nz/news/a-stain-on-our-country-kiwibank-economis…
Yes. There is some evidence that in some countries (e.g. New Zealand but not the US) older workers are staying in employment longer. This effect isn't that great but it cushions the market slightly.
In the US it seems more people retire when the share market does well but then Americans have had market based 401k plans longer than New Zealand has had Kiwislaver so the investment cycle has a more pronounced impact on the ability to cash it in and retire.
Agree. this is 'normal'... strange how because the reserve banks created some form of a financial utopia for 10 years... think low cost borrowing, high employment, ever rising house prices... people (and economists) start to believe we will always go back to that world.
Reality is that that 'financial utopia' has created all sorts of distortions and long term structural issues that are going to take quite a while to resolve and dropping interest rates and printing money cant solve the next set of issues - as thats what created them. This time we will have to let things unwind to their natural state
Rampant inflation left and right. NZ dollar continuing to falter and one of our biggest customers China stops spending and hunkers down for their inevitable housing collapse. That action effects not just Fonteiras milk powder but will be felt globally.
Accordingly little ol NZ pulling up from inflation....believe it when I see it.
Kiwibank economists need to look at what is happening to both the Kiwi (down) and long end yields. Bond investors are losing patience with CB's and it could get nasty. Also, just because growth is slowing doesnt mean inflation will. We could still have a day of reckoning, particularly if the bond markets become dislocated.
By getting nasty Te Kooti means there is a new nemesis in town the bond vigilante's! The price of new debt issued by the NZ govt is ultimately driven by the price of debt on the secondary market. If people start selling NZ debt it will become prohibitively expensive for the NZ govt to issue new debt. At a certain point the system breaks as the NZ govt can't or won't want to pay the price the market demands for their debt.
This leaves two options austerity or monetisation of the debt. The problem with the former is it will cause a depression like you have never seen. The problem with the later option is it is inherently inflationary and the NZ dollar will need to be renamed the peso. People like myself are watching the 10 year bond yeild like a hawk.
At a certain point shit will hit the fan. Even today we hit new highs on the 10 year of 5.15%.....
I think NZ is in troubled waters at a 10 year of 6%. I think we are toast at 7% especially if the current account stays the way it is.
The scary part is the lack of willingness to change by the NZ population. This reflected in 60% of us still voting for a major party. There seams to be a consensus that an economy built on the imaginary wealth effect and flipping houses is going to work for us moving forward. I think NZ is not far off its Minsky moment.
Unfortunately we wont experience the change in a moment, it will be like boiling frogs slowly... our infrastructure and standard of living will simply increasingly decline.
We are about to vote in Luxon and his team who have become the highest polling party just by not being Labour. That is a huge risk as they havent really been forthcoming about their vision and plans... and probably will avoid needing to do so.
The big thing National is being open about is their desire to restoke housing via immigration, tax rules for landlords and possibly things like foreign ownership. It is not surprising considering Luxon, his MPs and party sponsors and mates all have considerable investment in NZ property.
So more likely we bundle low skilled immigrants into the country , build cheap houses for them en masse, let them buy cheap cars and use crap public transport, let the elite who employ them milk them for their earnings via high priced food, services (e.g. banking) and accomodation (via the supplement) ... and those that can't afford private healthcare and private pensions will end up in a crap poorly services system. Roads will also decline rapidly - but i suspect only those that can afford newish electric cars will be able to afford to use them. I suspect Mouri will similarly be relegated to the back of the old system.
So all in all... great for some (elite) not so good for the peasants
Im referring to bond markets where central banks have less influence, they are losing faith in central banks resolve to bring inflation down. If bond yields continue to spike higher (convexity selling in the US), central banks will have to raise cash rates. It will also blow out deficits.
Let's not forget the impact of the election on Interest rates
National wins -> They have committed to removing RBNZ Dual mandate -> Interest rates higher for longer
Labour and co wins -> Status Quo -> Interest rates will need to start dropping as unemployment goes up due to RBNZ dual mandate
All the Banksters Economists, Independant Economists (ha flippin ha!! - economic with truths, lack any semblance of credibility, is their best description) - should be given the same derisory distain that we reserve for Real Estate Agents and prison inmates.
All the above are paid to lie, fib and deceive to line their own pockets. No honesty is required.
Those still clutching the ever skinner straws of the Debt backed Asset market, will be facing a scorched earth over the next 3 years, as Debt holding becomes toxic. (That is, unless you have previously cheaper 30year terms, like the US)
Indeed Hunkering down and diversification (+Cash) is the place to be. My little stake in Uranium looks like an outstanding winner.
Copper/Iron Ore will be, when both craters deep, after the Chinese halt buying most building commodities soon.
Keep powder dry.
Most of us have astronomical mortgages. A small increase in OCR has a vastly more significant impact on household expenditure than it did only a little while back. And with most people fixing their mortgages the effects of increasing the OCR are delayed until rates need to be re-fixed.
Actually, it's only a tiny percentage (< 5%) who have astronomical mortgages. Why should the rest of the population suffer higher inflation for their house of cards (though that is exactly what the employed but AS + TAS receiving mortgagee I know has told me needs to happen - at least until they are successful in offloading their property for double what they paid for it).
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