Kiwibank economists say current conditions only warrant a 25-point increase to the Official Cash Rate (OCR) and they are hoping the Reserve Bank - which has been eyeing a 75 point hike - will "meet in the middle" with a 50 point rise.
In their weekly First View publication, the Kiwibank economists - chief economist Jarrod Kerr, senior economist Jeremy Couchman and economist Mary Jo Vergara - note the "profound impact" of RBNZ rate hikes to date.
"Mortgage rates have nearly tripled. And both the NZIER business survey and REINZ housing statistics [last week] give cause for caution."
The economists' comments come ahead of the release of the crucial inflation figures for the December 2022 quarter. The RBNZ is expecting a 32-year high of 7.5% annual inflation, and it has indicated that it will follow its 75 basis-point hike of November (taking the OCR up to 4.25%) with another 75-pointer at its next review on February 22. The RBNZ's currently signalling a 'terminal' OCR of 5.5% by the middle of this year.
However, the Kiwibank economists say they see "downside risk" for the inflation figure.
"That’s good news. We expect the pace of annual inflation slowed a smidge to 7.1% from 7.2%. In the quarter alone, we expect consumer prices jumped 1.3%. The latest report is expected to show a continued slowing in inflation. However, broad-based inflation pressures remain. All major groups bar one in the CPI basket are expected to print a rise in prices."
But the economists say, should the inflation rate come in line their our forecast, they see the RBNZ delivering just a 50-point hike next month – "a move that should garner support from market traders".
They note that a lesser move than the previously indicated 75-pointer has implications for the 'terminal' cash rate.
"Currently, the terminal rate sits at 5.5% - with a 75bp hike baked in for February. A downshift to a 50bp move in February should also pull down the terminal cash rate. By the April meeting, the cash rate may peak at 5.25% or even lower at 5%.
"We believe the RBNZ has gained enough traction with their rate hikes to date, and a terminal cash rate of 5% (or lower) is all that is required to meet the RBNZ’s mandates. We continue to highlight that a move to 5.5% is likely to be a step or two too far," the economists say.
They say the focus of economists, traders as well as many business owners and households will remain on inflation.
"Inflation is the beast that needs taming. And the war on inflation is a world war. There is mounting evidence that the war on inflation may be won this year. Central banks, unwilling to take a backwards step, will continue to hike interest rates, just to be sure.
"The speed and extent of further interest rate hikes, however, is being dialled back. Global inflation rates may have peaked as goods inflation cools. Complicating the inflation prints, however, is services inflation. As we move back from consuming goods to consuming more services, inflationary pressures are shifting.
"Despite the cross-currents in the data, we’re confident inflation rates are peaking, now, and 2023 will be the year of the sharp reversal in price pressures," the economists say.
"...We see cash rates, globally, peaking in the first half of this year. And we expect central banks to start cutting interest rates by the end of the year."
In New Zealand, the economists see inflation sitting "slightly above" the top end of the RBNZ’s 1-3% target band by the end of this year.
"And early next year should see inflation back within the band and on its way to the 2% target midpoint. It’s a slow journey back, but the descent has begun."
62 Comments
With record profits already smugly declared, they can afford to eat some losses. Perhaps the RBNZ is wanting to crash the housing market as the big 4 have too much power and influence due to this, and they need to be taught a lesson when poking their nose in where it isn;t wanted. Far reaching I know, but the thought is there
While I agree with you that he should raise by 100 bps, I am convinced that he will raise only by 75 bps. There is no way, knowing his past actions, that he will go for a 100 bps raise. Swap markets are pricing a 75 bps raise as a central scenario, with some small chance of a 50 bps increase.
"economists see inflation sitting "slightly above" the top end of the RBNZ’s 1-3% target band by the end of this year"
Not sure what data these 'economists' (property ponzi optimists) are looking at? RBNZ is expecting 7.5% YoY inflation.
Anyone calling for 50bp has a mortgage (or 5). For transparency, I am 23 years old and am hoping to buy a house in a decade or so.
#100bp
SM.
Question - to what extent are the RBNZ either enabled or mandated to look forward (eg 6-9 months) versus looking at the ‘here and now’? If the latter dominates then they should be raising at least 75 BPs, if the former is a dominant consideration, then I think 25-50 BPs. If they are justified to look at both generally equally, 50 BPs would be the right call in my opinion, and look at one further lift of 25 BPs - and stop.
Thanks.
so presumably they can/should look short term (now and up to the next 6 months) and medium term (6-12 months from now).
If so, with the lagging impacts of OCR increases, I would think a balanced decision would be to hike 25-50 BPs. Given that even that, let alone a 75 BP hike, will be walloping the economy and employment within 6-9 months.
If they go harder, there’s every chance they will need to reverse harder too…
The cost for rented shelter didn't rise at the same level as most other expenses, and houses are now less affordable to own even though the cost of the asset has declined.
I can see how there's a margin of FHBs adversely affected, but day to day expenses and life for the general population hasn't been altered much by higher asset prices. Discontent about it however, is through the roof.
There’s lots of very wishful thinking in the comments section of this website. I get it, having only bought a house 3 years ago. It’s friggin hard buying a house in this madness. People want house prices to crash, and keeping on hiking the OCR helps to continue the crash. But once inflation moderates and unemployment surges the OCR will be cut , and it could be by year’s end.
People need to step back, put their emotions aside, and look at things objectively.
Look, it's really simple.
We want to keep the foreigners out to raise wages, but not have that manifest as a zero sum inflation game.
We want lower house prices, and lower mortgage costs to buy the cheaper houses.
We want to retain the sparse nature of New Zealand but with the economies of scale and peripheral opportunities of a much larger population base.
In short, we want a bunch of square holes for this pile of round pegs we have.
This is not just food but with width and breadth of our domestic economy. People here talk about increasing productivity, but we are a million miles away from many competitors who don't have the same measures and safeguards we have.
I'm not sure what the answer is because we want everything safe and nice. The alternative seems to be a more litigious system like the USA where you hit offenders with a tonne of bricks (and big legal bills).
I dont think there is anything here in the last 2 years that is making this worse, or anything in NZ that makes us less competitive to any other country. So im interested to hear what has changed in the last 2 years to drive up costs?
I have 10 years experience in Fresh Produce and Fresh Produce Equipment industry and NZ still has still one of the most lenient compliance as well as health and safety systems. Furthermore, compliance with those standards is also only average at best (similar to Italy and France). Food Safety compliance in the sector is not being driven by government regulation but by international brands realizing that any scare / outbreak will do unmeasurable damage to their brands. Think T&G; Mr Apple, Zenspri and downstream packhouses, etc. However domestic suppliers dont have this risk and therefore have sporadic compliance to even NZ's loose standards. A view of Country Calendar would show you this.
Perhaps your view is because your business has entered new markets and requires additional certification required by either the supermarket or importing country (there is a lack of global unified certifications).
I was disgusted by what some NZ (and Aussie) firms do for Food Safety in my tours. I will never eat fresh produce without washing it again because its so variable. Most NZ's think that KFC chicken was the source of their tummy ache, sorry it was probably the coldslaw... And its the same reason that the government doesnt recommend woment to go to sandwich bars.
Given that the major rises in CPI baskets where in housing materials, rents, food etc. rather than labor dumping more people in will likely send inflation to the moon.
That said government will probably do it just because immigration is seen as a general economic panacea when you don't have any better ideas. Businesses love it because they get most of the benefit but incur little of the cost to society.
Maybe Kiwibank have customers like these.
https://www.stuff.co.nz/business/130980589/family-faces-450-a-week-jump…
Purchased Jan 21 1.13 m with 910 k mortgage. Were paying 3.5% (assumed that was with 1% >80% LVR penalty rate). Now they are facing refix of close to 7% and payments increase of $450 week. Cutting expenses as much as they can but seems very tight considering they have 2 children.
Assuming they both work and they both earn over 70K. They would need a pay rise of 18k each a year to make the $450 per week after tax and not make any Kiwisaver contributions. BTW if you don't make Kiwisaver contributions your employer dosen't have to either. So its effectively a pay cut.
Assume Westpac said no to interest only. As they mentioned a second tier lender would do it for 8% pa and that would be their last resort.
Who on earth would take out a 910k mortgage.. (unless they are on adrian orrs salary). Somehow i am thinking their income is sufficient to sell at a loss.. save a few years and start over being more careful with risk and own a sensible house when older.
Compare their situ to a family renting with 2 people on minimum wage. Facing rent increases and inflation on basics. We have to make life hard for the people who over leveraged to drop inflation and accom costs.. to protect the poor because its right and also to reduce crime.
I remember there was a lot of talk at that time of interest rates going negative. People seemed to think that rates wouldn't rise, especially as inflation had been so low for so long.
One issue tough is that a lot of rentals were also purchased during that time, and so some people have also got big mortgages on those rentals. So they may have to put up rents or sell, and if selling they could make a big loss. Or turn them into airBNBs, removing them from the rental market. It is really only the start of all this as many people will still be on lower rates.
Yip - and it is a tough lesson for those people. However they gambled and lost. It is pretty poor character of them to now act the victims. Suck it up, admit they took a risk and it failed:- they need to pay the piper and move on. The rest of the country will likely come out of it aok.
The facts are:
If interest rates had flatlined or dropped in the last year instead of rising - the people that over leveraged and who made massive equity gains (on expensive houses at peak, business loans or investment houses) would not share their speculative profits with the other 95% of NZ. In the same way i see no reason that we have any pigment of responsibility to assist them now their gamble has gone bad and subsidise their losses
I don't think they have lost unless they must sell at loss.
if you look carefully on the interest figures, the interest rates is about to be peak if they haven't already peaked. this means house price is about to find its bottom, and will take off in a year or two.
at the same time, first home buyers are not finding it easier to buy because the tighter lending environment. Renters who could not afford to buy are still not able to buy and will enter another cycle or property boom, and left out.
Lets see what happens to the OCR and economy
NZ local inflation is embedded and still rising and potentially global inflation hasnt run its course. Local business revenues are at risk.
I would expect multiple OCR hikes are neededbto dampen domestoc inflation quickly taking it to 1.75-3% higher than now .. in H1 as orr has to be drastic and act with urgency to stop the train and avoid a derailment later. With inflation continuing to rise during that period. This will will hurt many and cause intentional unemployment (one stated aim of RBNZ), force house sales at much lower prices than now and lead to much further erosion of national house prices and reductions in rent. At the same time construction and house sale related industries will crash.
Losses for many invested in housing will thus be realised over the next year or so. 2024/25 willbe the time for cash up buyers to snap up bargains.
The RB will only want to get in the ring with inflation once. Not blink to early and need a second fight, that's alot worse and means a lingering longer recession.
Cause some pain to a few and do the job.
Having said that 4% inflation is looking like being seen as the old 2% ....
https://finance.yahoo.com/news/top-economist-mohamed-el-erian-110000647…
There's the Sticky core and services components to inflation now. The world has had decades of low/negative interest rates. Good luck with that wait.
Of course banks want interest rat rate rises to be small. But inflation was allowed to get out of control. We had a war that started a year ago which also increased inflation. Then we have supermarkets that are still increasing their prices now, and food is increasing by more than inflation figures, so that is pushing inflation higher. Funny that many products that are descretionary haven't risen by the same extent. If there was some competition in the Supermarket and building materials sectors, prices wouldn't have been able to rise as much and interest rates wouldn't be as high. But supermarkets know people need to eat.
As Chippy/Hipkins would say 'it's a pandemic of inflation'. Orr has been jabbing with not much success...mean while mortgage holders are starting to get into stress, the housing marketing has stalled & the economy is screeching to a hault. Is the 'cure' worse than the 'disease'?
Many of them (those that are perceived to belong to this group) already were, and from all the different ethnic groups that get lumped into the term "pakeha". Most do not identify as pakeha but they do not have the civil rights to deny this generalisation. Many people find it offensive
Can't remember now where I saw it, but there was a list of steps that would happen as the OCR is increased:
1) Increasing interest rates makes saving more attractive so less is spent in the economy.
2) Increasing mortgage rates reduce the amount of disposable income that home owners have to spend in the economy.
3) Less being spent drives down prices as competition for the smaller numbers of buyers increases.
4) Less income sees revenues drop, and businesses start laying off staff.
5) Unemployment increases which expands the numbers not spending on the economy.
6) This feeds back into the loop and accelerates the process.
RUC charges increase will further distort the market place... then there will be the removal of the fuel tax subsidy...its not looking pretty... Id sit on the current rate because I know the next move could be the straw that breaks the camels back....lol Im picking they will plough on (because the folk deciding have obscene incomes ) and it will all go pear shaped for the masses.... this will indicate the chasm between hi and low income earners and further obliterate the middle class....Good luck with the next hike it will be entertaining watching the cracks start to open
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