Westpac Chief Economist Dominick Stephens forecasts OCR will rise to 6% by late 2013 and says now is the time to fix; NZ decoupling from soft global economy. Your view?
Westpac Chief Economist Dominick Stephens has forecast New Zealand's economic growth rate will rise to 4.5% next year as low interest rates, high export commodity prices and stabilised house prices boost activity and inflationary pressures.
Releasing Westpac's July Economic Overview, Stephens also forecast this growth and a ramp up in Christchurch reconstruction would be factors forcing the Reserve Bank to put up the Official Cash Rate to 6% by late 2013 from 2.5% now. This is significantly higher than the bank itself, markets and other economists are forecasting.
Although the Reserve Bank was unlikely to start raising the cash rate until December, it would then raise it quicker than the market and other economists expected, he said. See what all other bank economists expect here at The Crystal Ball.
“The economy is responding to low interest rates, high export commodity prices, stabilising house values, and better agricultural growing conditions," Stephens said.
Westpac expected growth to reach 4.5% in 2012, as Christchurch reconstruction activity ramps up, and as business investment picks up after a period of underinvestment, he said.
Stephens acknowledged the global economy was entering a soft patch, but the New Zealand economy had 'decoupled' and entered a 'self-sustaining' recovery.
“Central banks in Asia are determined to cool their overheating economies. Ballooning government debt is taking a toll in the United States and Europe. And New Zealand’s tourism sector could soon feel the effect of plunging consumer confidence in Australia," Stephens said.
“It is not that unusual for New Zealand growth to “decouple” from the global cycle in this way. In 2001 and 2002 New Zealand enjoyed high growth while the global economy merely puttered along. And the tables were turned last year, when we languished while the global economy steamed ahead. Being small, the New Zealand economy is sometimes buffeted by idiosyncratic developments such as local climatic conditions," he said.
Economists generally expect the Reserve Bank to leave the OCR on hold on Thursday in its statement due at 9 am, but they expect some comments about the high currency and the prospects for a rate hike later this year.
“We don’t expect the Reserve Bank to begin raising rates until later this year, but we do expect a reasonably large OCR cycle," Stephens said.
"We are forecasting the OCR to rise by three percentage points over the course of two years. That’s more than markets are currently pricing in, meaning now is a good time for borrowers to fix their interest rates," he said.
Here is more detail from Westpac's overview below:
We see two factors that could leave the RBNZ cautious about earlier tightening. The first is that the New Zealand dollar has soared to new post-float highs (see below), which will directly help to contain inflation. Moreover, the RBNZ has a historical tendency to delay OCR hikes on the grounds that higher interest rates would cause a further unwelcome appreciation of the exchange rate. The second factor is the gathering clouds around the global economy (see the International Outlook section).
Australian consumers’ loss of confidence could hit the NZ tourism industry, and slower growth in China and India could hurt commodity export prices. Most importantly, financial markets’ concern about the impact on European banks of the inevitable debt restructure in Greece (not to mention worries about the long-term solvency of bigger countries like Italy), has caused a squeeze in credit markets that is being felt worldwide.
Credit default swap (CDS) spreads for the Australasian banks have risen to their highest level since May-June last year, when Greece first required a bailout. spreads remain high for long, bank funding costs could rise, leading to a de facto tightening independently of the RBNZ, as seen in 2009. Barring any reversal in these two factors, we continue to forecast a December rate hike, later than the Sep-Oct start that the market is currently pricing in.
The real point of difference in our forecasts remains in the extent of the tightening cycle. The RBNZ’s most recent projections suggested an OCR peak of around 4.5% by early 2013; market interest rates, despite the more aggressive near-term profile, imply a peak of around 4%. We expect OCR hikes to continue through 2013, reaching a peak of 6%. We have long been sceptical of the idea that the ‘neutral’ level of the OCR has permanently fallen in the wake of the global financial crisis.
Notably, the RBNZ’s assumption of a lower neutral rate was partly based on a sense that a 2.5% cash rate was providing less stimulus than expected; the latest GDP figures (including upward revisions to history) test that logic.
Secondly, on our forecasts, Christchurch reconstruction activity will see the NZ economy running above its long-term potential for an extended period. That implies some monetary rigour will be needed just to keep average inflation near the upper bound of the 1-3% target.