The Reserve Bank may have "already done enough" with its increases in interest rates, BNZ's head of research Stephen Toplis says.
In a preview of the next Official Cash Rate review on February 22 Toplis says the BNZ's economics team "remain in the camp that says the Reserve Bank should now be moderating the pace of increase".
"Indeed, with the long lags between monetary policy setting and the economic reaction function, it is conceivable the Bank has already done enough. In particular, it is worth noting that a significant proportion of past tightening is still to hit mortgage holders’ cash flows. It will, in due course."
The OCR currently stands at 4.25% having been hiked at speed from just 0.25% at the start of October 2021. In an extremely 'hawkish' Monetary Policy Statement that came out in November with the last OCR review, the RBNZ hiked the OCR 75 basis points and indicated likelihood of a follow-up 75-pointer in February 2023. It forecast the OCR to peak at 5.5% in the middle of this year.
More recently, wholesale interest rate pricing has suggested the RBNZ may 'only' raise the OCR by 50 points to 4.75% and that's what Toplis is suggesting, though concedes it's a "line call".
He says monetary policy settings are extremely tight.
"The Reserve Bank has its foot firmly planted on the brake. There comes a time when such restraint is no longer necessary. We are definitely approaching that time."
He says however he recognises that financial markets are "very keen" to price in a near-term reduction in rates.
"The RBNZ will not want to encourage that sentiment so will be 'forced' to keep tightening," he says.
"Given this, we think the best approach for the Bank would be to raise the cash rate 50 basis points to 4.75%, signal 25 to 50 basis points further thereafter and then move to a data watching framework accompanied by a strong warning that it expects interest rates to stay elevated for an extended period of time."
Toplis says while he thinks a 50 basis point hike would be the “best” approach, it is easy to see how the RBNZ could justify maintaining the 75 point hike that was intimated at its meeting back in November.
In addition to moderating the pace of the tightening cycle, Toplis thinks the RBNZ may well lower its expected 'terminal' OCR rate by 25 basis points to around 5.25%.
"We doubt it would feel comfortable reducing it by any more than that, at this juncture. However, we remain of the view that the ultimate peak may be as low as 5.0% rather than the 5.5% the Reserve Bank currently forecasts and the market currently is giving a nod to. Whatever the case, we think that the peak will come relatively early in 2023, rates will stay there for around 12 months before trending lower starting in calendar 2024."
40 Comments
I agree, and I also strongly agree with Toplis statement below:
"Given this, we think the best approach for the Bank would be to raise the cash rate 50 basis points to 4.75%, signal 25 to 50 basis points further thereafter and then move to a data watching framework accompanied by a strong warning that it expects interest rates to stay elevated for an extended period of time."
I would like to think given the numbers and the supposed independence that the logic above would hold.
But, they always seem to err (or should that be Orr) on the side of "decrease". I think they will "look through" the inflation numbers and focus on current events resulting in a no change in Feb.
If RBNZ is more concerned with internal inflation, food costs and re building after floods will likely constrain their view of inflation either peaking or being transitory so further rate rises are more likely than not and .75% may be enough either in one hit or two. When the lag between predictable mortgage rate rises translate into household budget changes of discretionary disposable income the way forward may become clearer but not better.
Record $10.5 billion of new mortgage commitments advanced in March 2021. How many of those borrowers would have felt comfortable then taking the 1 year fixed deal of 2.25%. They are now staring down a refix next month at 6.5%. Every 100k borrowed will be costing additional $77 per week in interest. On top of everything else going up. 800k Auckland mortgage will be $600 a week of additional after tax income and the equity you thought you had is well and truly gone if you were a FHB in 2021. April 2023 will be a month of pain.
According to Westpac Chief Economist. New Zealand's Effective mortgage rate is currently 3.7% and will rise to 5.3% by the end of the year.
He said approx 640,000 households are servicing a mortgage on the house they live in.
New Zealand now has has 337 Billion of total mortgage debt.1.6% additional mortgage interest will be 5.4 billion per year. Average only tells half the story. It is the 160,000 upper quartile(of debt) owner occupied mortgage paying households that will take the pain for the next 2 years. But the negative wealth effect will be felt by the whole economy. Anyone who is put into a forced selling situation is going to suffer a financial setback that could take many years to recover from.
Had we not had the transitory inflation malarky the Reserve Bank would likely have had more latitude. The time for "wait and see" is over, now they need results and every quarter they don't meet their inflation target further entrenches higher inflation expectations.
This is no time for half measures.
In March 2020 RBNZ dropped rates 75bps bps (to just 25bps) while inflation was at 2.5%, told people rates wouldn't rise for 12 months and plugged $30bn into LSAP. They did that, of course, because they where preempting a deflationary emergency associated with the nascent flu pandemic.
Right now we actually have an inflationary emergency and there is a debate about if we should fully deploy tools to fight inflation. This is clearly not a symmetrical rates policy.
The 50 pts rise is almost certainly already locked in - it's enough to stop mortgage rates from falling more than a few points and enough to demonstrate 'credibility'. It's also absolutely the wrong decision - catastrophic for tens of thousands of people who are going to find themselves desperate and on the dole this year.
If RBNZ has done enough and they started 9 months ago, why do we not see a change?
Inflation is still high and economy is still running hot with job market at its all time high.
They don't take house price into consideration but it's still high and out of the reach of many.
There is still a lot of available money in the market and RBNZ stops now they will be behind the curve and will take a long time to catch up and that will cause prolonged suffering.
Not doing anything is not the answer right now.
Isnt that the problem. We cant wait a year for the outcome. Inflation is getting 'baked in' and the poor are already struggling. The weather events will worsen the inflation in the short term and the fed is also still raising and stating concern. So here the ocr has to raise 'hard and fast' until we a signifiant see inflation drop. We have to shock the markets and population into changing habits.
It is obviously going to lead to a recession and job losses in the short to medium term. But Orr has said that was an acceptable objective.
Ocr needs to rise 75 to 100 bps per interval. When inflation drops significantly they can consider a slow drop back to a norm maybe 100 to 200bps below the top.
I would lobby for an alternate solution to give the rbnz more direct control of the economy, ideally minimum 50% of all home and business loans should on variable rate.
The poor are struggling? Living costs for poorest households and beneficiaries have increased by less than minimum wage and average hourly wage increases. Maybe you are referring to the kind of poor people that have significant savings and are losing money in real terms?
Zollner seems like the only one that tells it like her actually sees it.
Bank economist are looking to give markets move their way, so Reserve Bank will not want to unset market expectations
We're in an inflationary cycle which could last 10-15 years. The disflationary one post GFC did.
The economic paradigm that we operate under makes no sense. If petrol prices, food and construction costs are driving inflation, what on earth is adding to peoples pain with higher mortgage payments going to do exactly?
The petrol will still be an international prices.
The food prices will still be affected by bad weather.
Construction firms wont be any more efficient.
The prescription doesn't match the disease. And yet people blab on about 0.5 or 0.75 as if is actually matters!
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.