ANZ economists foresee prices rising more aggressively than expected, so believe the Reserve Bank (RBNZ) will respond by hiking interest rates in larger increments than usual.
ANZ economists now see the RBNZ’s Monetary Policy Committee hiking the Official Cash Rate (OCR) by 50 points when it meets in both April in May.
This would bring the OCR up from 1% to 2%.
ANZ economists previously thought there was a 50% chance the Committee would hike by 50 points.
The Monetary Policy Committee typically changes the rate in 25-point increments, but when it last met on February 23, it said it was “willing to move the OCR in larger increments if required over coming quarters”.
ANZ chief economist Sharon Zollner and senior strategist David Croy expect the OCR to reach a peak of 3.5% in April 2023. Previously they forecast it peaking at 3%.
Their change in outlook comes as they now see consumer inflation peaking at 7.4% in the June quarter - above the RBNZ’s forecast peak of 6.6% in the March quarter. The Consumers Price Index rose 5.9% year-on-year in the December 2021 quarter.
“The RBNZ would prefer to look through oil price shocks, but right now, with inflation expectations so high and rising, they just can’t,” Zollner and Croy said.
While consumer inflation is running hot, and there are “clearly mounting downside growth risks, both in New Zealand and globally”, they expect house prices to fall 10% in 2022. Previously they expected a 7% fall.
“Evidence continues to mount that the housing market is slowing more rapidly than their forecast, and things could get a little messy there,” Zollner and Croy said.
They noted back-to-back 50-point OCR hikes seem risky when double-digit house price falls are forecast.
“But there aren’t any low-risk policy options anymore,” they said.
“The fact is, it’s just no longer true that mild downside growth surprises will derail OCR hikes.”
Drivers of inflation
Zollner and Croy noted a lot has changed since the Monetary Policy Committee last met (and hiked the OCR by 25 points).
Crude oil soared to nearly US$140 a barrel at one point this week, rather than start its journey back to US$80, as the RBNZ assumed it would a couple of weeks ago.
“There seems little hope of the Ukraine situation being resolved quickly, and we do know sharply increasing fuel prices will be particularly visible,” Zollner and Croy said.
“Indeed, analysis shows that petrol prices have a much bigger impact on household inflation expectations than their weight in the Consumers Price Index alone would suggest.”
They said rising inflation expectations could also feed into a wage spiral, “given the extreme tightness in the labour market”.
Furthermore, commodity prices have jumped. Dairy commodities are trading at an average price of US$5,065 per tonne versus the RBNZ assumption of a moderation to US$3,500 over the forecast period.
And, a net 74% of firms surveyed as a part of ANZ’s Business Outlook survey intend to raise prices over the next year.
End of low inflation era
Zollner and Croy questioned, "If inflation risks are so severe, then why won’t the RBNZ just carry on and raise the OCR to 5% or 6%?
"The OCR may well get there, in the fullness of time, given our sense that climate change and de-globalisation spell the definitive end of the very-low inflation era.
"But it seems more likely to be in the next cycle - we’ve got the aftermath of a housing boom to tidy up first."
Zollner and Croy believed a 10% fall in house prices, from the elevated levels they're at, would constitute a "soft landing".
They said concerns around the impact of a larger fall would be a greater impediment to the RBNZ lifting the OCR more quickly, than concerns around the impact of higher debt servicing costs.
The latest from the RBNZ
Interest.co.nz spoke to RBNZ Deputy Governor Christian Hawkesby on February 28 - five days after the release of the Monetary Policy Statement, and just as Russia's invasion of Ukraine was really kicking off.
He said, "If oil prices stay where they are at the moment, that’s higher than where we projected in our Monetary Policy Statement.
“So, the very near-term implication is that we’ll have higher CPI outturns over the next quarter or so than we had factored into our statement.
“The key judgement for the Monetary Policy Committee will be - we can’t control that. It’s happened, it’s come from overseas, what does that then mean for the outlook for inflation going forward?"
130 Comments
50 bps increases are still too little too late. The OCR should be hitting 3% by May, not 2%, if the RBNZ wants to retain some hope and credibility to combat inflation and try to unwind the results of its stupidly ultra-loose monetary policy of the recent past.
100 bps increases are necessary, to make any difference.
Not increasing the OCR quickly and aggressively now will result in the RBNZ being forced to go even higher later on.
Even if the RBNZ acts timely, the OCR peak of 3.5% predicted by ANZ is still too low - the peak will have to go between 4% and 5% in order to rein in a potentially runaway inflation surge.
A lot of the assumptions around the housing bubble being "iron clad" was based on the assumption the vested interests would always be willing and able to step in an arrest any correction.
It is looking increasingly likely this is the event - from outside influences - that forces their hand and they are unable to effectively intervene.
Ironically it has come about largely due to the RBNZ's inaction in failing to raise rates to try and get on top of inflation early - simply to protect the housing bubble. They had 9+ months of clear data that showed the aggressive stimulatory monetary policies needed to be gradually withdrawn. Instead they may now be forced to move very quickly and creating a minsky moment.
They actually need to drive non-tradable inflation down now to counteract tradable inflation. A reduction in rents, rates, utilities etc. is required to offset increases in commodities. If consumers are hung out to high inflation the economy will crash as spending declines in real terms.
Certain government policies couldn't have come at a worse time such as the planned phase out of low-user power plans that will make 40% of NZ's households worse off by up to $126 in annual fixed user charges.
https://www.mbie.govt.nz/building-and-energy/energy-and-natural-resourc…
The worst part is MBIE claims the remaining 60% households may not necessarily be better off from this phase-out exercise, since there is uncertainty over how power companies will choose to structure their pricing plans once the phase-out begins, and therefore what the impact on households will be.
Not just oil, most commodities have been moving upwards in tandem.
Don't see it though, if they where going to do the 50 they'd have done it last time they reviewed the OCR. If anything, the fact the Russians haven't cut energy exports despite the war, means inflation is likely more subdued than it could have been at the last meeting.
along with wheat, soy beans, rice and oats ...
scroll down for yoy increases https://tradingeconomics.com/commodity/oat
If so, have ANZ recalibrated their house price and economic growth forecasts?
If the RBNZ does this, then we'll be in a recession by mid year and house prices would likely have dropped at least 10-15%.
Edit: I see they have in fact changed their forecast of house price declines from 7 to 10%. I think the declines will be greater if the OCR is 2% by June.
there may well be recession ahead and that is probably the safer option than letting inflation erode our collective wealth and further impoverishing the poor.
Besides if inflation causes massive increases in living costs, the result is the same, no discretionary spend = recession
Completely agree. At the current rate there's every chance we're looking at a 15% or so decline by June. If that happens the second half of 2022 will be very interesting.
On an anecdotal note, I've never seen so many for sale signs pop un in such a short amount of time around my neighbourhood.
100bp of hikes in next two months … and OCR peak of 3.5% and forecasting house prices to ONLY drop 10% this year?!? … Sorry ANZ but either you’re just trying to be dramatic and get some click bait or your model of house prices vs interest rates is broken… down 20-30% is the more likely outcome if your OCR path is correct.
And yet the extreme measures the RBNZ went to in 2020 to avoid that outcome (a house price crash) by removing things like LVR's that were put in place to protect buyers from overextending themselves....and yet it would appear that if we do have a crash now, that Orr and the team used the buyers as collateral in order to kick the can down the road a few years after encouraging banks to go out and lend, lend, lend.
Such a crazy situation and set of actions by the central bank.
Hi DDDDebt.
Another way to look at it , for every 1.00% increase in OCR is about $100,000 off the value of the average kiwi home.
https://www.rnz.co.nz/news/national/459095/million-dollar-homes-average…
Why waste effort training a numpty when your entire manifesto could fit on a sticky note: more migration, less construction, more roads, more utes, less taxes on the rich, remove environmental regulations, deregulate tenancies and employment, and cut back spending on education & health.
Sudden short shocks will decimate consumer spending but they're basically inevitable after leaving things too low and arguing about transitory this and temporary that.
We're heading for a very, very dark time that may well see recent FHBs wiped out without housing becoming any easier to buy for those currently on the sidelines. And that's before contemplating the effect a collapse in discretionary spend would have on employment numbers. Everyone assumes their job would be safe if interest rates suddenly spiked and house prices dropped. That's a bold assumption to make.
Yup. Some of us here have been arguing stagflation for a while and it looks like we now have target fixation. Inflationary wage growth spirals can't save us but it might help ease the pain, but will only reward those who are prepared to job-hop. NZ employers generally won't meet a market rate to keep staff, so they deserve everything they get.
Yeah I see a lot of 2nd tier lenders ending up in strife.....where are they getting their funds?
many from supposedly sophisticated investors chasing higher yields.....finance co debacle no 2 on the way?
how many developers are going to get squeezed between cost overruns and falling finished product prices??
This recent housing boom has lured in a lot of property investors to become first time property developers. There are a high number of inexperienced first time developers that have popped up in the last few years. Including in my own extended family. Zero experience in building or running a building project in uncertain times, just the belief that if you can leverage up, you can’t lose.
Very true. There is a lot of people who assume prices can’t fall as owner occupiers will just hold and can eat the rising cost of debt servicing. I agree that owner occupiers will just hunker down.
Its the specuvestors and the highly leveraged developers that will likely be the hardest hit. They can’t just hold on. Interest only loans, high leverage, rising interest rates, evaporating capital and capital gains turning to capital losses could quickly become untenable.
The cowboys will be spooked. Unfortunately, the seasoned spruikers will just wait out the tide for our housing-led national economy to topple over and RBNZ to then cut interest rates aggressively in an attempt to pump liquidity into our "markets".
Obviously, the only markets that matter to the RBNZ and Labour-National are REA auction rooms.
Unfortunately, far too many people listen to spruikers like Ashley Church... who now tells us the only thing we have to fear is fear itself
OECD have been warning of this for years
We topped their list of countries with highest risk of a correction
https://www.newshub.co.nz/home/money/2021/06/new-zealand-tops-bloomberg…
Correct, the banks stress test only cares if they get paid at 7%, not if you have to skip a meal to fill the tank to get to work.
Fortunately I think the whole game will have collapsed long before we get there, anything above 6% is 'Danger Will Robinson' stuff.
You know, to ordinary working people. Probably not to cabinet ministers or senior governors at financial institutions that will remain nameless.
I don't quite adhere to the idea of people's position having to be black or white, for or against, "spruikers" or "DGM", in my opinion, the world is more nuanced and the world changes. Indeed for about 30 years, house prices have mostly gone up and they have been an outstanding way of making money. Today I see so many headwinds pushing against property all at the same time, headwinds that didn't exist only a year ago, so yes, I think house prices are going to go down, I also think inflation and interest rates are going to continue to increase significantly, which will hurt many less wealthy people and a recession will follow. When the mess is over in a few years? time, I might well become bullish again, I don't see a problem with adapting my views and strategy to changing conditions.
Yes good on Yvil.
For a long time he certainly seemed to be a believer in the religion of 'House Prices in NZ can never crash'.
It's a shrinking religion, a shrinking Church of believers, but there's still plenty out there. In fact A. Church is one of the few high priests still publicly saying there's no house price crash, not even a 'correction'!
Meanwhile, CWBW still hasn't come out of the basement / dungeon with the boys. Too much fun?
Yes, many cycles, and got hit quite hard by the 2007/2008 crisis. What's your point?
I sold my share portfolio last October after having a pretty good run for 5 or so years.
I'm happy enough with cash in the bank for now in addition to the house I live in, I might buy some shares after they tank even more.
I said the RBNZ should have gone 100bps last review but no. They are falling further and further behind but refuse to acknowledge it. What do I think now ? They are clearly in total denial so expect tiny 25bps rises for the rest of the year. External pressures are mounting, can they continue to ignore them now ?
They noted back-to-back 50-point OCR hikes seem risky when double-digit house price falls are forecast.
“But there aren’t any low-risk policy options anymore,” they said.
Why would the RBNZ be worried about house price falls? Surely they have ensured the banks would be safe under those circumstances (its not exactly something unexpected), and they shouldn't be worried about the economic outcomes as that is not in their remit (there is always an economic downside to raising interest rates to curb inflation). The only reason would be the stupid full employment target, but considering we have very low unemployment and very high inflation, that doesn't seem like a good reason.
I agree its clear that the RBNZ intends to sit on its hands for as long as possible. Unfortunately for them the outside influences that are outside of their control are starting to mount. Oil predicted to hit as high as $200 a barrel and we will have $4 a liter petrol in no time flat. This flows into transport costs of food so even official inflation is going to go double digits and we already know its actually already double digits.
I just read these articles now as either banks asking for more free money (interest payments) from Govts, the wealthy demanding a higher return on their wealth, or business leaders demanding action that increases unemployment so that their labour costs don't go up.
Also worth noting that some of the products with large price increases (e.g. oil) are not substitutable in the short-term. Higher prices for these products will therefore have a similar demand-side deflationary impact as changes to OCR / mortgage rates - i.e. they both reduce disposable incomes, aggregate demand in the economy, and unemployment. I personally don't think demand-side measures will make any difference to prices - but, hey ho. Sometimes I think economists just love a good recession.
What is your alternative to avoiding recessions?
It would be like having life with no death, reward with no risk. Where would the balance in that be?
The avoidance of recession the last 10+ years has caused many investors to believe markets are risk free (it has also severely distorted prices of assets like property, shares and bonds to unsustainable levels). That simply isn’t true. People are behaving irrationally because they haven’t been hurt for their excessive risk taking. Many lessons are to be had from a recession…a chance to learn what is true and what is not…a time to renew and rebuild…removing excess risk and inefficiency
That's a great question.
We have operated an economic model since the 70s that incentivises boom and bust - particularly in the financial markets where the unchecked creation of credit, leveraging off that credit, and a frankly wild west derivative market create wild swings, over-valued companies, and rampant speculation (gambling).
We need much stronger stabilisers than wiggling the OCR up and down in an attempt to (a) control the quantity of credit fuelling the economy, and (b) keep 'just enough' people unemployed.
Those stabilisers would include going back to the future and re-focusing central banks on controlling the quality and quantity of credit. Whilst I buy the need for some leveraging and even the limited use of some derivatives (e.g. hedging), making cheap credit easily available for speculative purposes has to stop. I would also end involuntary unemployment and run a bank of locally run 'transition jobs' that people could take-up instead of welfare to stay in work, stay job ready, get training, and return to better paid normal employment when the market picks up. Planting natives, fencing off streams, or teaching music or te reo to kids would all be good examples in NZ. Note that this scheme is not a socialist dream - it is a strong fiscal stabiliser. Govt would invest more in these jobs during a downturn (providing fiscal stimulus to the economy) and less in the upturn (withdrawing stimulus).
Have you read much on Ray Dalio's long debt cycle and where we are at in that? It might clarify a few of the areas you touch on above.
Removal of the gold standard in the 70's perhaps explains a lot of what you describe above. Its only a matter of time before the USD loses its reserve currency status and given the amount they are printing and the conditions that now face us - it could be the only option they have is to print more $$ when they should be doing the reverse if the dollar had a sustainable future.
I am familiar with Dalio's views on the debt cycle - I would say he built heavily on Minsky's work, which had a bit more nuance, not least because Minsky was heavily critical of financial speculation and the parasitical tendencies of the finance industry (which is basically Dalio's job!)
The gold standard was regularly bypassed. I would point the finger of blame for over-financialisation at the rise of neoclassical monetarism, the cocaine fueled Wall St culture of the 1980s, and the unchecked introduction of technology and trading tools that have left us with algorithms in charge of sucking gains out of the economy, with ridiculously over-leveraged derivatives driving boom and bust cycles in the very commodity prices they were originally set-up to smooth!
Agree that 50 bps is to little to late and that 6-7% here we come. Regardless of RBNZ action/inaction the banks will lift rates at the behest of their overseas owners to continue their super profit extraction on the NZ economy. Tenants can double their rents to catch up....fat chance of that In the inflationary firestorm of 2022.
Time for patience and keep building the vulture fund. Yield math loves higher interest rates...
The bubble is already leaking air without any further change in OCR due to the credit tightening.
If investors start cashing up and getting out to avoid further losses in capital gains then this will accelerate the downturn without any intervention from Orr. Another OCR hike will just be more oxygen to the raging fires already burning.
This is going to get very real, very fast.
When the Nanny Herald is pumping this info out you know things are looking BAD.
https://www.nzherald.co.nz/business/interest-rates-to-soar-house-prices…
The amount of doom and gloom on here is outstanding!
Yes discretionary household spending will decrease as a result of increased mortgage interest payments. However your average household will just tighten their budget.
But remember we are in a tight labour market and households will seek to change their employment for a 10%+ increase in salary.
Property investors will feel the pinch. But every investment holds risk, and they've made huge paper gains, which will likely remain positive even with a 10 / 15% decrease in property this year. They can always sell.
I accept developers will be in a spot of trouble with high debt, increasing cost to service, and supply constraints pushing project deadlines.
Re interest rates, how much impact do you guys think an increased OCR is really going to have? It won't materially impact demand for fuel. And increasing costs of supply are a key driver of increasing / inflating product costs.
You forgot to mention a couple of things that are the main driving force behind house prices:
1. The already abysmal rental yields will tank (unless mortgage-free) due to higher interest rates. People won't be paying an extra 100-200 per week for a shitty 3br. Who's gonna buy rentals that have net yields lower than your average TD?
2. Tighter lending conditions will cut off the stream of buyers at the low-to-mid tiers. One might be able to afford a million dollar mortgage at 3%, but not at 5-6-7%. (Stress-test doesn't mean anything)
3. Sentiment is key. When most investors and wannabe FHB's think that prices will keep going up and up and up, people are ready to overpay just to "get on the ladder". House flippers won't be so eager to bid at auctions now, and a well-positioned FHB won't be rushing to buy that mouldy shack in Papakura for 1 mil.
Bold to assume that people can realistically change employment and just add 10% onto their salary just like that. Many of us are not in a position where we want to spin the roulette wheel and a being last on board with a new employer with a significant period of economic uncertainty looming may not work out for people if things get uncomfortably tight.
And unfortunately, 10% has to come from somewhere, and with business inputs rising many will simply say it's too hard to increase pay at this time. As usual, those in a position to take advantage will do well, but for those who aren't, they will take a big squeeze with no sign of relief.
I live in a provincial capital. My daughter put an offer on a bigger home for her family but was beaten by Aucklanders who offered $300k more than my daughter subject to selling their home in Auckland. The agent said the Aucklanders had an element of fomo in their offer. My daughter has taken it on the chin which is admirable. She did make an unconditional offer as she needed to be competitive. How is the Auckland market going currently? Is it as strong as it was late last year?
I'm expecting bigger house price falls percentage wise in Auckland than anywhere else. I'm hearing that people are bailing out of Auckland and many are heading North. I expect an Auckland exodus, sell while you can at stupid money and it buys so much more in the regions. There appears to be many seeking early retirement.
An agent from another firm thinks the vendor will come back to my daughter but that depends on what the purchaser is selling in Auckland and whether they get what they want for it. Where I live the agents are brutally honest. Less houses selling, less inquiry, fear of paying too much and mainly very hard to get finance.
Thames is a hidden gem, yes it is a pun on it being founded on gold mining. The local hospital, first built in 1868 and since refurbed, there is no lack of health care in close proximity. Has plenty of shops and eateries and popular coastal environments. Surprisingly cheap houses being snapped up
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