Westpac economists are sticking to their market outlying view that the Reserve Bank will increase the Official Cash Rate again next month.
The RBNZ surprised economists in May when it raised the OCR by 25 basis points to 5.5%, but then indicated through its forecasts in the May Monetary Policy Statement (MPS) that it saw no further rises.
Last week in its follow-up OCR review the central bank's 'pause' looked firmly in place, with the key part of the RBNZ statement being:
The [Monetary Policy] Committee is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range of 1% to 3% per annum, while supporting maximum sustainable employment.
The next OCR review is set for August 16, then there will be another on October 4 - just 10 days before the election - and the final review for the year is on November 29.
Most economists now believe the RBNZ is 'done' with the OCR hikes, which have seen the rate rise with unprecedented speed from just 0.25% in October 2021.
ANZ economists, however, have a now fairly long-standing view that the RBNZ will be forced back to the hiking table in November.
The Westpac economists are still sticking by their view that the RBNZ will be forced into action sooner, as soon as next month.
Senior economist Darren Gibbs in the bank's Weekly Economic Commentary said the Westpac economists are still of the view that the OCR will be increased by 25 basis points in the August review.
"As we have written previously, since the May Statement there wasn’t enough data to significantly shift the RBNZ’s strong view for a protracted period of unchanged rates.
"However, the month ahead will see some key information in the form of the June quarter CPI and labour market report," Gibbs said.
"These will provide more information on the persistence of core inflation pressures and the strength of the labour market, and hence prospects for a fall in GDP during the second half of this year."
In terms of these upcoming data releases, the Consumers Price Index (CPI) was due for release on Wednesday, July 19, while the labour market data - including unemployment and wage figures - was set for release on August 2.
CPI was largely tipped to fall from the previous March quarter 6.7% to under 6%, although the RBNZ's forecast is 6.1%. Unemployment as at the March quarter was 3.4% and the RBNZ has forecast that to increase to 3.5% for the June quarter, with a fairly sharp rise then ensuing, which would see unemployment hit 4.6%.
However, Gibbs says partial economic indicators released to date "suggest the labour market has not cracked yet".
This, he said, raises the likelihood that the RBNZ will need to upgrade its growth forecasts for this year.
"This would add some upside risk to the inflation outlook and lengthen the already protracted period over which inflation remains above the target range.
"As a result, we aren’t yet convinced that the door to an August tightening has been closed, although the hurdle to moving through that door remains high."
Westpac economists are among a group of main bank economists that have forecast quarterly headline inflation at 0.9%, which would see annual inflation slipping to 5.9%.
"A sharp 2.5% increase in food prices will make the largest upward contribution to quarterly inflation, while the decline in annual inflation owes almost entirely to lower fuel prices," Gibbs said.
Non-tradables (domestically sourced) inflation – of greatest importance to the RBNZ – also seems likely to print at 0.9%, he said.
"Thanks to a slower pace of increase in the construction sector, this will lower [non-tradable] annual inflation slightly to 6.2%.
"While down from last quarter’s peak of 6.8%, domestic inflation remains elevated and will need to decline much further if the Reserve Bank is to meet its inflation target."
47 Comments
If you're a NZ bank economist, it makes a lot of sense to the bank's bottom line (and your bonus) if mortgagees fix long at high rates and then are left paying above market rates when rates fall earlier than you "predicted".
We really need to hear from economists that don't have a conflict of interest.
"No rise and no fall people, its locked in now until after the election" Is the RBNZ susceptible to political influence now? Wholesale rates 2-3 years have been rising of late. Economists suggest this indicates OCR needs to be lifted still further. Perhaps you know something they don't?
I'm predicting that many of the predictions predicting a fall will be the wrong prediction and some of the predictions predicting a rise will be the right prediction, also some of the predictions predicting no change will be the right prediction but I predict that may change over the period of the prediction.
Now that is a comment. Gold. Potentially your on the short list for the new finance minister. I hear Robbo’s been on Seek applying for corner dairy accountant positions. But tbh it’s harder than you think make a buck in business so I’d say he’s best in the public sector where economics don’t matter when you have a team of 5 million paying your wage.
Kiwibank raises interest rates today
https://i.stuff.co.nz/business/money/300929367/kiwibank-lifts-home-loan…
"The one-year special rate lifts from 6.89% to 6.99% and the standard one-year rate, for people who do not have 20% equity, to 7.99%."
Standard rates seems to be a Taboo subject for Interest.co.nz articles . It sure is strange to get this great info from the MSM.
Standard Rates For Standard People.
10% Interest Rates This Year, Guaranteed !
And it looks like I have been fooled again, buying into the talk that locking in for more than 2 years in May would be a mistake. It's like 2020 all over again. Should have taken the 2.99% for 5 years, but I listened to 'wiser people than I'. Turns out, I was foolish enough to.
Not everyone is agreeing. https://www.youtube.com/watch?v=J5c3ZVNE3lw
Well it could, 10% chance it goes up 0.25% and I guess that would make my prediction wrong but would make bugger all difference to actual rates. Said it before the banks will move independently if they need to and completely ignore the OCR. Do I expect banks to keep raising rates ? the answer is YES.
You can tell we have reached the daftness stage now.
Firstly, we have bankers trying to scare customers into fixing mortgages at high rates for as long as possible "There is more pain to come folks, fix that mortgage quick now (and boost my bonus)"
Secondly, we have falling demand for food(!), falling global food prices, but sustained food inflation domestically - particularly for fruit and veg. Is this because we need to reduce the disposable income of people until they can't afford to eat fruit and vegetables, or could it perhaps be because our fruit and veg growers are heavily reliant on credit due to their income being, errrm, seasonal? Clue: It's the latter you monetarist muppets! High interest rates and margin protection in our competition-less grocery stores are pushing up prices.
Can anyone help untangle something that's been playing in my head.
My understanding is that around a third of kiwi homes have mortgages. It seems a reasonable understanding that the majority of these households are currently of working age. I also understand there to be a similar portion of the population nearing or entering retirement (approx 1.2M people between 50 & 70), who likely do not fall into that same cohort.
Given that retirement is typically when people with a bit of money stacked away begin to enjoy spending it, doesn't that mean we've got a situation where two large groups in New Zealand are pulling on opposite ends of the rope? That as mortgage holders are forced to reduce their spending, those in their 50s & 60s are beginning to ramp it up?
How do we reconcile this, given that the OCR is a blunt instrument?
Indeed. Households overall are actually net beneficiaries of interest payments - the biggest losers are the subset of mortgagors (100,000 or so) that bought relatively recently. However, their losses are outweighed by the winnings of the people with lots of money in savings / term deposits. The biggest losers at the sector level are businesses who are paying around $1.5bn in extra interest payments per month! Banks are winnning of course, because they set the odds.
So, yes, the OCR is a highly regressive redistribution mechanism - taking money from people who spend it on things they need and giving it to savers. The assumption is that savers are less likely to spend it and 'cause inflation'.
My view is that increasing prices, plus reduced disposable income for that subset of mortgagors, is reducing consumer demand overall despite the enrichment of people with lots of money. The data is pretty clear. However, I seriously doubt that reduced demand is going to be causal in slowing prices down. Inflation is subsiding at the same pace (or more quickly) in countries that have barely touched their interest rates. We have basically slammed the brakes on our economy for no good reason. We could have returned to an OCR of around 3% and just left it there.
In NZ if we hadnt raised the OCR then the employment numbers and money being spent locally would have led to catastrophic local inflation - together with the impact on on our dollar if we hadnt raised in line with fed (causing imports to rise rapidly in price).
Now - you could argue that if we had'nt dropped our OCR so far and so fast when COVID hit, and further had started to raise it BEFORE covid hit.. then we wouldnt have had such a crazy increase in house prices, employment and further down the road the start of insane local inflation... and thus wouldnt have needed to raise as far or fast (just to keep in touch with the fed). So our boom would have been much lesser and more sustainable and now we would have a much lower bust cycle..
But we did do all that... kinda like not stopping drinking after the fourth pint..... and then wonderi g why the hangover is sooo bad and long
There are a lot of assumptions there. There are plenty of countries that saw bigger jumps in employment, consumer spending, and inflation that hardly moved rates at all and are now seeing inflation subside as quickly (or faster) than us. We will never know the counterfactual but I believe that prices would have followed a similar trajectory if either (a) the OCR had been frozen in 2019, or (b) the OCR had been raised after the rates drop to around 3.5% and left there.
Reckon the banks throwing out lower long rates is a bit of reverse psychology?
"If we drop our long rates, sure we'll get some bites, but people will think in the long term rates will fall. So they'll think they're clever by fixing 1 - 2 years and refixing lower after that, aaaand gotchya".
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