ASB economists are suggesting the Reserve Bank consider lifting the Official Cash Rate (OCR) by 50 basis points next week and say interest rates can be used to 'douse the housing market'.
The OCR is still at the emergency level of 0.25% that the RBNZ dropped it to as Covid began to bite in March 2020. The central bank has its next review of interest rates on Wednesday, August 18, and most economists now believe it will raise rates then - but the general expectation is for a 25-basis-point rise to 0.5%.
However, ASB senior economist Mike Jones is suggesting the RBNZ could look at a 50bps rise.
"...A fast start can pay dividends. And so it would also be worth the RBNZ considering the pros and cons of starting with a 50bps lift. The traditional argument against is that a double-up can spook markets and cause volatility. But markets are already pricing a 12% chance of a 50bps raise, and we doubt a 50bp lift would surprise the economic consensus," Jones says.
He says the RBNZ has already met its inflation and employment objectives.
"Actually, we now know it probably met them a couple of months ago," Jones says.
"There’s still debate about the permanence of the upcoming spike in headline inflation. But core inflation is likely to remain above 2%. Further, last week’s labour market data confirmed we’re at, or above, Maximum Sustainable Employment. Sub 4% unemployment beckons next quarter and we expect wage growth to accelerate further. And yet, the Official Cash Rate is still at 0.25%."
ASB last week changed its call and is expecting the OCR to be back to its pre-pandemic 1.0% level by the end of the year.
Jones says "yes, there are risks" from the spreading Covid Delta variant and the Australian outbreak is "too close for comfort".
"But the clear and present danger is that economy continues to overheat, allowing inflation to get away. If things change down the track (*touch wood*), the RBNZ can always back off, just like we saw from the Reserve Bank of Australia last week."
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The other reason to get a "fast start" to rate rises is housing, Jones says.
"We never bought into the dire predictions for house prices we saw in the wake of the Government’s [March] tax changes. And, indeed, momentum has slowed a little, but not enough. Annual house price inflation is still chugging along at a 15-20% annualised pace. This week’s only notable economic data release – REINZ housing figures for July – is likely to highlight the point."
Jones notes that the RBNZ is frustrated with continued “risky lending” and is going back to the macroprudential tool-shed to find a bigger hammer.
"Ideally it wouldn’t have to. Using interest rates to douse the housing market is cleaner and potentially less distortionary. Making a fast start with interest rates – whether it’s three 25bps hikes in a row or an initial 50bps – might avoid having to play catch up down the line. With one eye on Covid, it seems to be the path of lesser regret."
46 Comments
The cluster #### continues.
A drive around some of the Hamilton suburbs this morning and what a sad site. Poorly maintained and crumbling properties everywhere. A huge build up of R&M and it seems very landlord is banking on their property being torn down and 6 apartments put up in their place. Sure it's happening for a many, but at some point this will run out of legs - and then what?
This is what would be absolutely and urgently necessary for the longer term health and balance of the NZ economy.
But I think that Orr will only increase by 25 or 50 basis points in August.
By November, we should be at 1.25% or even 1.5%, if we want to have any hope to avoid over-heating and over-inflating the economy.
You know what I have all but given up on this whole situation, I probably shouldn't read all the commentary going on as it just stresses me out! I would like nothing more than some meaningful action to do something to swing this shite show in the favour of future NZers but I am starting to think that the days of consideration for the 'greater good' are gone. We live in such a selfish, greedy world that it will just continue until what? I don't know but it won't be good.
As our resources run down, we keep consuming more in the relentless pursuit of some sort of personal utopia. No Govt is going to change this, even if they wanted to. The only thing that could have any major effect on things now is some massive global event and a lot of pain.
Depressing view I know and I would love to be proven wrong but feel we are just in too deep now. Gollum is never going to let that 'precious' go.
Brother I feel your pain. I am not optimistic but hopeful. Hopeful that one day - sooner rather than later - change for the greater good will occur. All we can do is to keep doing what little we can to bring that change about. You are correct that "Gollum is never going to let the precious go" so I suspect that it will have to come to the point where we have to throw the "precious" into the fires of Mt Doom for the greater good - and let all the little Gollums burn with it...
Ha, nice Kauri. Yeah very depressing but I agree with your comment, great attitude. I also believe that we, humans, members of a society, whatever, do have the intellect and ability to make change and do something for the betterment of everyone, we just need the trigger to get everyone on board.
I wouldn't rule 0.75% out, but 0.5% is way more likely. But i don't see it going any higher than that this year, they'll either dribble out 0.25% rises and just get back to 1% by the end of the year, or they'll bang it up 0.5% or 0.75% and wait to see the effect which will take 6 months to work thru to CPI and employment figures.
Boss this Orr will not even raise it by 0.25%.
Have understood their game plan start discussion and divert.
When the time arrives, Di what they are best at - Reason and Excuses to go with his favourite policy of Wait and Watch.
Now we all are waiting and watching also what bug announcement this Orr will do as HEADLINES were real BIG. Will he just tweek percentage of high leverage loan or target speculators by raising the LVR to 60%. Extreme measures but is house prices jumping 100% or even 50% not in extreme so Mr errORR needs extreme measures to show you have the balls to act.
Carlos67,
I would happily take your money. The RB will and indeed, should move cautiously and raise the OCR slowly. If there is one community case arising from the POT fiasco, what do you think will happen? There would have to be a total lockdown with huge financial consequences. If we get away with it-again- then the chances are that our luck will eventually run out before we get most people vaccinated.
Apart from that, as Brian Fallow pointed out a few days ago, there is no evidence as yet of wage inflation across the economy and the structural pressures that acted to lower inflation are still there. We are not likely to see sustained high inflation.
true! its just a giant ponzi, where you need to sell to a bigger fool.
Just cant keep going. DTIs already x 10 in Auckland, do you really think it can go to 20...
Its already a complete disaster, OCR must rise, its just a matter of how much.
The OCR was put to emergency levels last year, now the emergency is to cool the housing market. In fact I think secretly the govt would be happy with price falls, which they could explain away as fluctuations while the market is settling.
OCR needs to be back at 1% asap
"ASB economists say the Reserve Bank 'should consider' starting lifting interest rates with a 50 basis-point rise and says the central bank could use interest rates to 'douse the housing market'"
Agree time to tame as no more emergency situation and earlier better it is for long term.
Panademic more than health crisis has created an economy and social crisis and Jacinda Arden has failed miserably in her approach of wellbeing budget.
NZ economy though interrelated but being tiny country is different to that of USA, which has number of industries and economic activity unlike NZ where industrial activity is nill and all other economy has been forced to change to HOUSING ECONOMY - No wonder number of house being built is increasing but government and RBNZ narration that increasing supply will help is false as demand for land is shooting as everyone seems to get into safe and fast housing activity as a result supply is not helping in controlling the housing ponzi instead adding fuel to fire.
Know of so many who have diverted their business to construction or flipping / dealing ( will pay tax as even in business have to pay tax but in most businesses have to slog and get nominal profit with risk wheras - housing business with support from rbnz and assurance from Jacinda Arden is risk free and fast /easy money).
NZ may have managed pandemic but screwed social fabric and comparing with other developed countries does not help as is not as much as in NZ ( NZ house price rise is 30% to 50% and in USA 10% to 15%) besides in USA economy is bigger and has depth unlike NZ where only economy is ......
New Zealand house prices are the real pandemic not Covid.
We have nearly got vaccinated 20% in last 6 months (the day vaccine introduce), by this rate it will take end of 2022 to get everyone vaccinated. Also the immunity last for 6 months, so people need to be revaccinated. This is ongoing process if we are keeping interest low because of Covid situation than remember it is here to stay for next couple of years (or forever) with different variants.
We've done 800,000 2nd doses so far and currently about 260,000 a week. 2.8 million people to go (5.6m jabs) That's only 22 more weeks...
https://www.health.govt.nz/our-work/diseases-and-conditions/covid-19-no…
https://www.nzherald.co.nz/nz/covid-19-coronavirus-vaccine-tracker-how-…
:-) Yes, actually there is also minutely small chance of a nuclear war between China or Russia and the West - so we should keep interest rates low just in case. There might also arise a zombie apocalypse in the near future, so Orr might want to consider negative interest rates, just to follow his path of least regret.
I don't think they will raise rates as I think they will say it's too risky with the delta variant out there. Of course that's not the real reason, but we can't expect them to tell the truth given their history of dressing the truth up in different clothes. Happy to be wrong.
I fully agree that Mr Orr will not raise OCR and has just talked about it to portray that is concerned and want to act despite knowing fully that at the end will not raise and will throw one of the many excuses in his pocket.
Not to forget Robertson is no where to be seen nor Jacinda with their smirk.
Should lift. But will they.
Agree we can never have a back stop of lowering again if we dont raise to pre covid levels. Based on the madness out there the economy can clearly support lifting. While they do nothing housing it the burning cross that Labour is being crucified against.
No one will tolerate Labours socialist fiddling if they refuse to sort housing out. So far they have been worse that "pump the ponz" National.
Remember 0% isn't as low as they can go, because they have indicated that we could go negative in the future. So any thoughts of them needing to be high enough above zero so that dropping has a real effect, shouldn't exist. My suspicion is that we are now at the new normal, if we have a delta outbreak (or a zombie apocalypse), we can just go negative. Remember the RBNZ has given NZ banks enough time now for this to be possible. How negative you ask? Think of a number between 0 and 3, we could easily hit those and RBNZ probably considers them a target.
Absolutely delighted to be wrong.
The article in NZ Herald on ASB's Mike Jones also included this :
Quote :
Meanwhile, BNZ head of research has Stephen Toplis also published a monetary policy statement preview today, reiterating his expectation that the OCR will be hiked by 25 basis points.
But Toplis highlights the thankless task the central bank faces.
"No matter what the RBNZ does it will inevitably be the wrong thing," he says.
"Not because the RBNZ is incompetent but because getting it right would require an accurate forecast of Covid's progression, and economic impact, both here and offshore".
"This is simply not feasible".
One of three outcomes was likely:
• "We get a domestic outbreak of Covid sufficient to undermine demand and the need to raise interest rates or, at least, postpone any increase".
• "Covid variants get more and more scary and impede activity globally".
• "People just adapt to the new world, demand bounces aggressively, globally, while supply constraints remain elevated, resulting in a serious inflation problem
across the planet."
Like everyone else, the RBNZ would have to "adapt a central scenario which weaves down the middle of these options".
"In short, then, time will either show the Bank to have been too aggressive or not aggressive enough," Toplis said.
"That's the pleasure of being a central banker in times of excess confusion".
Unquote:
So, RBNZ may very well resisit the pressure of these Banks to raise rates, thus giving them a boost to their profits, instead of seriously hurting the house price growth or even taming the so called inflation monster.
Hope, RBNZ sees through these games and stick to its middle of the road approach and raise OCR to say 0.35% ? Or should they Auction that as well ?
Yes totally agree - RBNZ should start with a 50bps rise.
It is difficult to see how NZ is going to avoid a humanitarian crisis for renters in the bottom quartile. Over the next few years private rental supply will decline & rents will increase.
If you decrease supply & increase demand, it can only result in rent increases. Renters that cannot afford to pay will continue to be forced into emergency accommodation or some other arrangement.
The actual average real rent or “sticky” rent that is now being paid has a long way to go to catch-up on market rents.
How will this end? It’s hard to predict but the evolving rental property crisis is likely to the number 1 issue at the next election.
https://population.org.nz/app/uploads/2021/08/Bentley_Sticky_Rents_Affo…
It seems to have the biggest effect on housing, very little seems to be going to business. It is giving house owners more leverage and as they feel richer, they are buying more, causing supply problems with covid, which is resulting in inflation. These are all knock on effects.
Businesses are already hurting due to the pandemic, rising wage costs, lack of customers, council road works, etc.
If OCR is increased and rates are passed on to the business lending, then that is going to hurt them more. What is the justification of that ?
OCR has been primarily used to scare away home investors since last 2 decades, with minimum success to write home about.
Leave the interest rates where they are and regulate the housing market;
- ban interest-only residential housing loans.
- implement universal rent controls by setting weekly rent maximums (i.e., lower the current cost of renting via government fiat).
A rush of properties come on the market and the only buyers are owner-occupiers, and they can take advantage of the low interest rates. Businesses that employ people (which are struggling) maintain the benefit of the low rates as well.
Desperate/uncertain times call for bold measures.
Received a letter from a major building materials merchant yesterday. Price increases from major manufacturers ranging from 5 to 15%. Most have already hiked prices this year. Orr...watch & wait, look through temporary inflation so no hike this month...lets not do what'll make me look bad folks, please go back to your house trading and irrational exhuberance I'm not going to be the one to shut the party down.
House prices need to rise further all around NZ, they are not keeping pace with the marginal cost of building a new supply. If you look at say a section costing a minimum of 300k, stormwater and wastewater and other services another 100k, and building an average sized home say 500k, then you have developer profit and tax of say 100k.
The absolute minimum currently to build new stock is $1,000,000 so prices will keep rising cost plus pricing.
The only variant is bigger house, bigger price, and section cost maybe -100k at best or up to plus 1m dollars.
Until they over produce and their is too much supply, then developers going under, and first home buyers not able to afford 1 year rate at 5% and have to quit their home, will prices come down.
Say 2023 / 2024.
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