Global independent economic researchers Capital Economics see the Reserve Bank as needing to lift interest rates from next year as economic conditions improve beyond expectations

Global independent economic researchers Capital Economics see the Reserve Bank as needing to lift interest rates from next year as economic conditions improve beyond expectations

At a time when much of the conversation among economists has continued to be whether and when the Reserve Bank will drop the Official Cash Rate below zero, one global economics research firm is now seeing the RBNZ being the possibly "the first advanced economy central bank to hike interest rates".

This could be as soon as the second half of next year, according to Capital Economics' Australia and NZ economists. At the moment the OCR is at 0.25%.

Capital Economics describes itself as one of the leading independent economic research companies in the world, with a team of more than 60 experienced economists providing macroeconomic, financial market and sectoral analysis, forecasts and consultancy, from offices in London, New York, Toronto, and Singapore.

In an Australia & New Zealand Outlook publication Capital's Australia and NZ economists Marcel Thieliant and Ben Udy estimate that New Zealand’s economy has already returned to its pre-virus growth path.

"With the housing market overheating and surveys pointing to rising price pressures, we think the RBNZ could become the first advanced economy central bank to hike interest rates."

The economists say the financial markets have started to price in a 30% chance of one 25 basis-point interest rate hike by the RBNZ by end of 2022.

"Indeed, we now expect the Bank to start hiking interest rates towards the end of next year and have pencilled in one hike to 0.50%."

Thieliant and Udy say the RBNZ predicted in November that NZ's GDP would only return to pre-virus levels around the turn of this year, but it already did in the third quarter of 2020.

"We expect output to keep rising at a robust pace, which underpins our view that the unemployment rate will fall to 5.0% by the middle of this year rather than climb to around 6.5% as predicted by the Bank. We think it will fall further to just 4.5% by end-2022, leaving it not far above its pre-virus low of 4.0%. With the housing market firing on all cylinders, we think the [RBNZ] will start tapering its bond purchases by the middle of this year."

They say inflation in New Zealand may reach the 2% midpoint of the RBNZ’s 1%-3% official target next year.

"In New Zealand, near term inflation indicators suggest prices could soon surge. We’d take that with a grain of salt. After all, as in Australia, wage growth remains subdued and the rising exchange rate is putting downward pressure on import prices. But given the rebound in activity, the decline in inflation should end before long.

"Skyrocketing house prices point to a surge in the cost of building a new home in the months ahead. And we expect the spare capacity in the labour market to be used up in the coming months which should boost non-tradable inflation from Q2. We therefore expect both headline and underlying inflation to return to the middle of the RBNZ’s target band by the end [2022] of our forecast horizon."

The economists say consumption in New Zealand was already above pre-virus levels in Q3 2020. And with limited boost to household incomes from stimulus measures, the savings rate fell back to around 5%.

"We had previously thought that strong consumption growth was driven by pent up demand which would fade in Q4. However electronic card spending data suggest that consumption rose further. We think it will rise by 7.5% this year.

"The red hot housing market should spur residential investment in New Zealand to rise further past its pre-virus level. Indeed, strong building consents are consistent with our view that residential investment will rise from 5% above pre-virus levels in Q3 to 15% by the end of 2022. And while business investment didn’t quite rebound to pre-virus levels in Q3, we think it will get there by the middle of this year. We’ve pencilled in a 12.8% rise in business investment this year."

Thieliant and Udy say New Zealand’s "generous" wage subsidy covered more than 50% of employees at its peak, which prevented an initial spike in unemployment. And even after the subsidy started to wind down in Q3 the unemployment rate only rose to 5.3%.

"We estimate that it edged up a bit further to 5.6% in Q4 as the scheme came to an end.

"The participation rate never fell much during last year’s lockdown and we expect it to gradually return to its 2018 peak by the end of next year.  And with activity above pre-virus levels, we think employment will surpass its pre-virus level in the second half of this year. All told, we expect the unemployment rate to decline to around 5% by the end of this year, in line with the improvement in job ads.

"As spare capacity diminishes, we think wage growth will rise as well. Indeed, lower underutilisation and the rising minimum wage should result in wages rising 1.8% this year and 2.2% in 2022."

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70 Comments

Well, if all the evidence points towards reduced interest rates being rocket fuel to house prices, then I guess it has to be an option to use, doesn't it.

Great news for retired people with savings held in bank term deposits. They’ve been suffering for several years now and have been trumped by those who have invested in assets - such as property and equities.

TTP

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There's often been one off comments made along these lines but one the other day made me think. It was along the lines of needing $10m in term deposites to return a meager sum to live on. What I haven't seen is any in depth analysis of the actual effect this is having on retirees and their savings, all the commentary is centered around home mortgages and FHB etc. Bit of balance on the effects of current bias would be good.

Because that would not sell newspapers. Who are paid for by real estate advertising.

In a way, given real wages and productivity haven't increased, all this rampent money production and asset price inflation is doing is devaluation of the dollar in real terms.

So yes, pat yourself on the back for being such a great investor then sit down and calculate the likely yeilds you will get on your portfolio when you retire. Factor in rising costs of everything...

most people I speak to in my age bracket (40s) do not have a serious retirement plan. Let alone questioning the direction/sustainability of all this.

Pay mortgage. Work. Pay Mortgage. Work...Ohh look! The block is back on TV!

Interesting the way some people think they are going to live forever. If you had $10million in the bank, trust me you don't need to earn any interest or even collect the super either for that matter. Start spending that $10million, your not going to need it all.

I do wonder the proportion of retired people with investments in funds and the like vs the classic term deposit. Does the stereotype of senior savers putting cash in banks hold true, where those people do have more savings? Or it has been a case that people have historically been terrified of the sharemarket after all?

Going by my own Parents in Law who are in their mid '70s - they have over 500K in term deposits. There is no way they'll invest in the sharemarket.

They probably should. The NZD Fiat is not a good bet at the mo

As I said, they're in their mid '70s. They still think they should leave their children an "inheritance" (even though we're both worth more than they are by a long shot). They refuse to travel because they want to "leave the kids something". I suspect there are a large number of folks in my in-laws position. They're that old fashioned they actually trust the Bank Manager to have their best interests at heart.

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"(even though we're both worth more than they are by a long shot).".....Dude, do you ever listen to yourself and think; "maybe, just maybe, I'm a bit of a twat."

You said it for me ....

Do you ever read more than the first line of a post and actually digest it?? Maybe, just maybe you're the twat. Actually in my world a person like you is called a @#$%tard.
My point was neither siblings needed the inheritance so why keep it in the bank. If you had half an ounce of ability to read between the lines you'd have cottoned on. The fact you're a banker must have coloured your reaction - I'm being both generous and sarcastic

BTW Bulgy - I've never met a banker that wasn't driven by Bank profits and personal bonuses primarily, with customer long term benefits coming a distant 3rd

Hook... parents in their mid 70s who are no longer spending much should be gifting the majority of the inheritance money asap so the benefactors can get the most from it. But good luck with having that conversation. Personally I have instead asked my parents to leave my share to their grandkids (my kids) as they will receive it at an age where it will help them a lot. For many, receiving inheritance after age 55 or 60 is of very limited value.

Exactly Karl, unfortunately it comes down to the personality of the parents, some have a million bucks in the bank but will not give their kids a cent. I got lucky and was gifted money early to buy a house, it changed my whole life. Had I received it now it would have been to late to make a major difference.

Carlos67.. yeah I think many oldies have a personality type where they want to leave something when they die, maybe even feeling (consciously or subconsciously) that it will help them to be remembered more fondly if the money is received upon their death. Like the fear of a shark attack (in NZ anyway). it is illogical but understandable. #diewithzero.
PS: I got 20K from my parents at 21 and it was enough to change everything for me.

This. Couldn't agree more. (sorry, low value comment, but just had to do more than a thumbs up)

lastredact.... IMO if you have money and are (reasonably) financially literate (and responsible) you should probably have both. Holding part of your net worth in bonds and TDs and part in property and shares means it is very likely that whatever happens part of your money does well while the other part doesn't. I call it reverse gambling but if you want to sound like one of those worthless economist types the correct term is negative co-efficiency.
If all your wealth is in one place you are high stakes gambler, whether you realise or not.

LOL
Rising interest rates?
thats brilliant
Boom times indeed

It's all in how it's spun.

This isn't just increasing interest rates. It's doubling them!!

Double SFA is still SFA. Will banks raise rates - unlikely, they have the FLP and very low cost funds available offshore

So raise interest rates and push the NZD up versus other currencies with the inflow of cash. Is our export market overheating or something?

They're going to raise interest rates....
And then they're off to drink the Atlantic ho ho ho

"Indeed, we now expect the Bank to start hiking interest rates towards the end of next year and have pencilled in one hike to 0.50%."
LOL
I thought Allan Bollard claimed an OCR setting at 3.5% was an emergency level.

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I've never been happy with the term "hike" being used in this kind of situation. Sure it'd be doubling the OCR but it's a bit like me hiking from my front door to my letterbox.

Coming from a guy who phrases every RBNZ cutting cycle as a "halving of the interest rate" (to make it sound more significant than it is), I'd have thought you'd think this was an emergency.

When it takes $1,000,000 bank deposit to save $10,000 at 1.00% per annum it is an emergency. More so, when median house prices in Auckland are also around $1,000,000. Back in July 2008 OCR was 8.0%, hence a $125,000 deposit at 8.0% generated $10,000 annual savings.

Nah. These foreign jokers don’t understand Enzed. Interest rates will *not* rise, because property.

Whether this eventuates or not, there should be a warning to those - especially FHB - with large mortgages that there is considered to be some upside risk of increased OCR and clearly this is likely to lead to increase in mortgage rates.
While I have been supportive of FHB, I have usually qualified that with the statement to be prudent and pay down one's mortgage as much as possible.
Amazingly I had some posters criticising me as they did not seem to understand what this meant.
Simply it means deferring SOME discretionary spending such as desires for a new/updated car, extending the deck, replacing the five year old lounge suite, the new updated TV, a spa or swimming pool. While desirable and part of enjoying life, to be prudent is deferring such items a year or two and directing saved money into additional mortgage payments to reduce the principal. This is especially so if one is going to leverage off (i.e. borrow against) the mortgage to buy these things.
Most mortgage documents include a provision for some additional payment.
At the moment, as mortgage rates are so low there is not the incentive to pay down the mortgage.
However, an additional 1% increase in mortgage rates on $600,000 is an ADDITIONAL $6,000 a year in interest - $240 a fortnight after tax income. At one's marginal tax rate of 33% that is $9,000 of pre tax income.
Even if $12,000 is paid down over a couple of years and interest rates go to even 4.5%, that is $540 a year ($20 per fortnight) less after tax income . . . and that is savings per year, every year.

Bollocks. A FHB who scrimped and saved to pay an extra few grand off their principal will be pretty much in the exact same position if interest rates increase. It won’t make much difference whether you owe $600k or $590k or $580k, if interest rates go up the mortgage repayments will go up a lot too. In fact in the current environment you are better off paying the minimum mortgage payment (or even interest only) and throwing the rest at the sharemarkets or bitcoin or something ludicrous.

Agree and if interest rates go up (highly unlikely) rents go up as well

Cant agree more, at current rates of 2.39% (what im on) and inflation at 1.5% (apparently, we all know its higher) the real cost is only about 1%. The opportunity cost of paying down the mortgage compared to buying Bitcoin at its current stage in the market is nonsensical. NO I am not saying mortgage the house to buy Bitcoin haha, just dont pay it back any more than you have to. My prediction is an easy 100k by December this year just for context.

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Pure bull. The RBNZ will not raise the OCR to 0.5% because if they did they will in effect be doubling their own debt repayment interest. Im sorry but you can not just inject $100 Billion into the NZ economy and expect nothing to happen ,as per the past it doesnt work.
Cash is becoming a Liability and debt is becoming a asset.

Rates will rise when other countries do the same.

So what if they increase their payments. They can create the additional funds with the click of a mouse.

Subsequent governments will then push us through 8 years of austerity after which we'll all vote brexit and blame it on the foreigners.

What is austerity?
Are we not already in de facto austerity with creaking and failing infrastructure and services?

My prediction 1%ocr end of this year.

No way.

Better reread those tealeaves bud

you left the decimal point out :)

hummy... fair enough. Only those who, 3 or 4 years ago, predicted the OCR would be well under 1% in 2020 should feel entitled to rule out your prediction.

My automatic gut reaction was 'BS', but....
If borders open up early next year there could be an influx of migrants and tourists, which could generate inflationary pressure. And they are talking about late 2022 for a possible 'hike . So it's quite possible.

A hilarious read. Is this a poorly done satire piece?

As I have said before, IMO the RBNZ will let inflation run for some time over it's target rate and call it something like "pent up inflation" or similar. It has to try and lower the proportion of private/speculative debt vs productive economy. Allowing inflation to run along at between 3-20% for a few years would help to inflate away the debt and get wages back up a bit. The gubbmint just need to supplement that with building more and giving the RBNZ new tools (like a DTI).

Well, for once I agree with you Blobbles

Will never happen - you cannot taper a ponzi!

Good on them for expressing their own view but I believe they will be proven wrong, I cannot see the OCR rising next year, the economic pain form the lockdowns are still to come

What pain do you see coming Yvil?

I'm not Yvil, but supply chain issues are becoming more apparent, and these are going to slow projects down. Tried to order bog standard stainless bolts and got the last box of the shelf from our local supplier, new shipment expected late Feb. They'll source some from another local importer, but the cracks are showing.

Thanks Pragmatist, good to hear some intel.
For what it's worth I think the NZ economy will be 'OK' this year, provided we don't have more level 4 lockdowns.
If we have level 4 again, all bets are off...

Pragmist
Just a comment on stainless bolts.
True story: A year or so ago I ordered 200 stainless bolts from an Auckland supplier - the bolts came separately from China, the washers by separate parcel from Australia, and the spring washers in another delivery from the UK.
Hate to think about production, warehouse and supply issues currently under variable Covid restrictions.

Hi Fritz, I'd like to take this opportunity to comment on a post of yours, I saw too late to reply to, last week. In that post you said that your 80 year old dad is putting his money in the sharemarket. Admittedly it's not my business but please try to see my comment as a genuine concern. I think this is hugely risky for two reasons, 1) sharemarkets are ridiculously overpriced and I for one see a serious correction happening this year 2) at 80 years old, your dad may sadly not have enough time to ride out the correction until it returns to levels at which he bought in.
Sincerely

Thanks Yvil. He perhaps should sell up, although he's made about 30% over the past year so I guess even if there's a big correction he's got some buffer. Also he is in exceptional health so could easily live 5 more years+, although of course it can be unpredictable at that age.
But yes if I was him I would probably sell while ahead.
Thanks for your thoughts.

Fritz....FWIW, even though I hold a big portfolio of NZ shares, I totally agree with the two points in Yvils post. As a general rule, the older you are, the less likely investing in shares is the way to go. And at age 80, with the NZX 50 increasing 30%+ in 2019 and 13% in 2020, IMO the safe option would be to unwind at least a portion of his stock (unless of course he understands his stock investments are (probably) risky but derives pleasure and enjoyment from gambling and would not suffer greatly ( either mentally or through a drop in standard of living) should things go badly. GL to him.

Hmm, it's not gambling if you're investing into strong, well run NZ or AU companies. A few stand-outs from our portfolio; MFT, FPH, RYM, POT, CEN, CNU, EBO, IFT. Long term holds in my view.

Mountie... I hold 11 NZX stocks which includes 6 of the 8 companies you mention (was 7). Maybe over a minimum 30 year period you could argue the risk is low enough to say it is not gambling but any less than that........
But nothing wrong with a good, sensible +EV gamble (where you are not running the risk of ruin) as long as you understand that you are, to at least some extent, gambling, or speculating (rather than investing) if you find that word a bit more palatable. Good luck sir; if you win (on the NZX50) I will likely win too.

I have a very similar portfolio as you. The only difference is that I have ARV and SKL too. Any thoughts about it ? Thanks.

My old man is 84 lives in Spain, just told me the other day that he sold all his shares and now he sleeps better knowing he has his money safe and enough to last him out.

Hans... if his investments did not pass the sleep test there can be no argument he did the right thing.

Reckon they're dreaming.

'New Zealand’s economy has already returned to its pre-virus growth path.
With the housing market overheating and surveys pointing to rising price pressures,'

Yep back to the same o' cluster&#^@ as soon as given the chance, and we can be world leaders in doing it.

Yes I think they could put them up a bit. For about a nanosecond, then realise they were wrong to do so and reverse the increases, and lower them further.

Interest rates can never go back up again - or half the mortgage holders out there will go bankrupt. And we know that will never be allowed to happen.

Yeah agree.
There will be a credit crunch in the next couple of years, then the OCR will be deeply negative.

They can put them up if there is inflation including wage inflation. Not sure how likely that is. If unemployment rates drops it is definitely possible.

Predictions are almost pointless right now when there is so much uncertainty. For example, another level 4 lockdown this year- quite possible - will throw our economy into chaos.

exactly, or even a new Covid strain that we are unable to find a vaccine for.

Keith Woodford makes the point that we have no immunity to Covid at all in NZ, so if we were to get it, we could end up worse off than other countries: https://www.interest.co.nz/rural-news/108646/covid-19-path-turning-corne...

Unlikely. The debt burden on New Zealand households is very high, if households had to survive on just their wages spending would collapse. Just holding rates and pausing LSAP/FLP should be sufficient to dissuade anyone of the notion that we have any we need to raise rates.

The history of RBNZ should be sufficient evidence that having a low-side bias is a folley.

The writing is on the wall folks, this signals the beginning of the end for the speculator gravy train

Unlikely. The gravy train is most of the NZ economy.
I think we'd have to see the $NZ smashed to an extraordinary extent before the RB would countenance raising rates by more than a few BPs.
We won't see any interest rate rises til bog-standard rump steak is over $55 a kilo.

Nobody is forced (at least not yet) to put a substantial amount of their wealth (Fiat money) in the bank. We should be looking at offering/educating people the alternatives.

These researchers at Capital Economics will need to ask the folks at the Bank of International Settlements in Basal, Switzerland, if they intend to allow the Central banks under their control to reverse rates.
The unclear (but sometimes extremely frank) speeches of the governor, Adrian Orr, have indicated that he has not got the levers of control in his hand.
And, to boot, he has stated in one of his moments of great frankness (back in 2018) that the NZ banking system would suffer to the point of crisis should the average Joe property speculator be discouraged from borrowing by higher rates and the consequence of a market in reverse.