Economists see the latest very strong GDP figures as providing a green light for the Reserve Bank (RBNZ) to begin raising interest rates as soon as next month.
The RBNZ was clearly poised to increase the Official Cash Rate from the current 0.25% at its last review in August. However, the central bank held fire as the country went into Level 4 lockdown on the very day it made its decision.
But the RBNZ has itself subsequently indicated it's not likely to hold off on raising rates for long. And economists believe the economy will again bounce back quickly from lockdown as it did last year. Therefore the expectation is that the capacity and pricing pressures that were there prior to lockdown will still need addressing through higher interest rates.
The next RBNZ rate review is on October 6.
ASB senior economist Mark Smith said NZ's GDP had managed "a massive 2.8% climb" in the June quarter - suggesting that "the heady pace of momentum had strengthened prior to the current community Covid-19 outbreak and the economy was on the cusp of overheating if it was not already doing so".
The RBNZ had itself forecast only a 0.7% rise for the June quarter GDP.
"In our view the RBNZ will look through the near-term disruption caused by the outbreak and the path of least regrets still necessitates some removal of monetary stimulus," Smith says.
"A gradual series of 25bp OCR hikes beckon, starting from October."
The ASB economists have "pencilled in" 25bp hikes in October, November and February 2020 that will take the OCR back to pre-pandemic levels (1%).
"Beyond that we envisage the OCR peaking at a historically low 1.50% from the end of next year," Smith says.
Kiwibank economists say "the stars have aligned" for rate hikes.
"A red-hot economy, tight labour market, rising consumer prices, and eye-popping house price growth.
"When the stars align like this, a rate hike is imminent.
"There’s little need for monetary policy settings to remain so stimulatory. We’re no longer in a recession. The RBNZ has already called time on its bond-buying programme (LSAP). The next move should have been a rate hike in August. But cue the Delta outbreak. However, a softer blow and rapid rebound from the Delta Lockdown is expected. The RBNZ is unlikely to be blown off course.
"We expect the RBNZ to follow-through in October, with three hikes to 1% by February 2022. Further rate hikes will be dependent on how the economy responds to rising mortgage rates. But we expect the cash rate to move to 1.5% by this time next year. All lending rates, and savings rates, will push higher into next year," the Kiwbank economists say.
ANZ senior economist Miles Workman says "it might sound strange to some" that an OCR hike is on the menu come October "even though economic activity has fallen off a cliff" in the third quarter we are currently in.
"But we should remember that the RBNZ is an inflation-targeting central bank and that the supply shock that comes with lockdowns means inflation and inflation expectations are unlikely to fall off the rails any time soon," Workman says.
He says while the impacts on economic momentum over the medium term are arguably a lot less certain (and more important for the monetary policy outlook), "we know fiscal policy is stepping up, is effective at protecting jobs, confidence, and household incomes, has plenty of ammo, and is better placed to provide the targeted support that is needed now".
Therefore "this resource-constrained economy" is still likely to need a little less monetary stimulus ("particularly the still-nutty house price impulse") even though many are still doing it tough "and some data are about to look terrible".
"Simply put, [the RBNZ] not tapping the brakes slightly now would add to some pretty significant boom-bust risks."
33 Comments
Auckland drops to level 3 lockdown just in time to be stung with rate rises. Other news just arrived in my inbox...
"Newly released OneRoof figures show New Zealand's average property value has (hit) the million-dollar mark for the first time."
Someone got so excited they missed the "hit" in the mailout.
So the range of GDP forecasts for the above mentioned economists , with all info on hand was between 1.1 percent to 1.5 percent , and they have the audacity to come out immediately and provide more forecasts. Perhaps they should defer to a machine in Massey. New Zealand will be in recession in 2023 at which time all of these OCR rises will be unwound
An OCR peak at 1.5% is very conservative and very much on a low side, as it assumes that inflation will be stable and low, and that the current upswing in inflation is just temporary, all of which is a strong assumption that might well be proven optimistic.
If this does not eventuate, there is significant risk that interest rates will peak at a much higher level. An OCR peak at 3% or higher would be, in this case, a distinct possibility. If central banks find themselves incapable to control inflation effectively, or move too late with interest rates rises, we well might see interest rates reaching levels not seen in a very long time. This would create carnage in the housing market.
That is right - the choices are:
A) Choose the pain of deleveraging
B) Choose to devalue the currency, then painful deleveraging happens anyway when confidence in currency collapses
The blood suckers at the top always go for B because they think it keeps the host alive longer.
There is more to play out here eg. CBDCs sold to us as a solution (then they get devalued as well).
Yes, all things being equal the OCR will be raised 25 BPs in October.
But these economists and their corny scriptwriters should have learnt their lesson by now. Things can change very quickly. Whether that is covid outbreaks or a China Crisis.
Premature in my opinion to talk about raising the OCR up to 1.5% next year. At least without big caveats.
But these economists and their corny scriptwriters should have learnt their lesson by now.
Would live to see these frauds get their comeuppance. However, the roadkill (meaning average NZ h'holds) could be horrendous. And I don't wish that on anyone just to see the economists and their comms strategists get humiliated.
Given the vaccination rate will soon surpass governments initial benchmark I think there is minimal risk of further lockdowns and economic impact from Covid-19. Also the uncertainty around border reopening may stoke wage inflation as employers start to bid-up blue collar jobs without cheap imported labour to suppress wages.
I wouldn't be surprised if we saw back-to-back OCR hikes now the threat has subsided.
Orr will look for any excuse possible to not raise it, I don't think he has ever raised the OCR the whole time he's been in the job.
It looks like he was a political appointee with one job, keep lowering the OCR, and boy did he do that, and mostly when there was no good reason to.
RBA: the interest rate will be increased in 2024, no rise in near future.
https://www.marketwatch.com/story/rba-s-lowe-pours-cold-water-on-early-…
If the interest goes up NZD will shoot like anything (It's already very strong by fools statements).
Another reason today's case 13 and we are exactly 19 days away. Don't think we will be 0 by than, also if we go to level 3 the number will rise for sure.
I don't think it will set the stage for interest increase. They will announce minor changes on 1st Oct & that's it. Property is bound to go up in coming summer not even a single factor signalling it will slow.
This sounds like a pure guessing. Even if you got lucky, this guessing somehow ends up happening. The interest rates will increase heaps more after the lockdowns. So it's down to raising it now or raising it heaps more later. I understand that you personally don't want rates hike because that can put your houses into negative equity. But economy does have its cycles. There is time that it will go through recessions which requires low interest rate to support. There is also time that it will go through expansions which require higher interest rate to prevent overheat. Having a wishful thinking won't help you with your investment decisions.
I would love to know what people actually are doing when their mortgages are coming due (ie 12 month fixed rate expiring). I am genuinely curious and would love to hear peoples answers
I did a quick calculation last night - and for everybody who took a loan out after July last year -when the fixed rates fell to 2.49 - they will now be paying a higher rate.
If somebody moves to a 2 year rate most are currently at 3.29- 3.5%- they will now be paying around 1% more than their current rate- for a 500K loan this is an extra $5000 a year or $400 a month - for a $1M loan thats an extra $10000 a year or $800 a month.
5 year loan rates are around 4.3- 4.5% - which is 2% more than their current rate - for a $500K loan this is an extra $10000 a year or $800 a month - for a $1M loan thats an extra $20000 a year or $1600 a month.
Thats a lot of disposable cash to come out of the economy. If you are taking a longer fixed rate ie 2-5 years - what are you intending to cut back on to meet the new repayments.
All this is why I broke and refixed long in May. I've had to suck up higher rates on two loans, but they're relatively small, while one loan only went up 0.04%, and one dropped. I paid $60 to break 3 of them, and the other was about $1,200. It's looking increasingly like I'll make that back in short order.
This is what I did for investment property:
two thirds fixed early this year principal and interest 4 years 3.09%
One third interest only five years 2.99%
Next year putting another 100k on the revolving credit facility reduce interest but keep it on call to compensate less deductibility and higher taxes coming.
Overall objective is to repay all debt within next 4 to 5 years as loans become due. This is happening alongside building another 20 houses, the loans for which get repaid in 5yr.
No lending on own home anymore.
The gypsy trembled as she gazed at her crystal ball
She said 'nothing's clear but I don't like what I see at all'...
I'd substitute Economist for Gypsy in the lyric but that would destroy the phrasing.....
Crystal ball gazing!
We expect the RBNZ to follow-through in October, with three hikes to 1% by February 2022
Previous crystal ball gazing!
In April last year, independent economist Cameron Bagrie went on Morning Report with a startling prediction.
"This downturn, recession, is looking a hell of a lot worse than what we experienced during the Global Financial Crisis. As a starting point, I'd pencil in house prices down at least 10 percent," he said.
Bagrie was far from alone in that projection.
Many of our best-known bank economists forecast a declining property market as the Covid crisis deepened last year.
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