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Global independent economic researchers Capital Economics have doubled down on forecasts of rising interest rates from next year and now see quantitative easing ending by the middle of this year

Global independent economic researchers Capital Economics have doubled down on forecasts of rising interest rates from next year and now see quantitative easing ending by the middle of this year

Global economics research firm Capital Economics has doubled down on forecasts made only a week ago that the Reserve Bank will be the first advanced economy central bank to hike interest rates - and it now additionally sees the RBNZ ending its quantitative easing (QE) programme by the middle of THIS year.

Capital, which in its earlier forecast called for a rise in the Official Cash Rate from the current 0.25% to 0.5% by the end of 2022, now sees THREE OCR hikes by 2023, making for an OCR of 1% by the middle of 2023.

It also believes that due to New Zealand's much better than anticipated recovery from the Covid economic crisis, the RBNZ will end both its large scale asset purchases (LSAP) and funding for lending (FLP) programmes by June. It picks a final size of LSAP purchases of around $60 billion - while at this stage the RBNZ is allowing for $100 billion.

The new forecasts make Capital very much an outlier among economists, most of whom were predicting not many weeks ago that the OCR would go negative early this year. While most economists have now backed away from such a scenario, they are mostly picking a flat OCR for the foreseeable future.

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 Economics Focus publication, Australia & New Zealand economist Ben Udy says in March 2020 Capital was the first to forecast that the RBNZ would eventually launch negative rates. And the RBNZ’s ‘unconstrained OCR’ forecast in November pointed to further monetary easing in the months ahead.

"However, there are several reasons why we no longer expect further monetary stimulus."

Firstly, Udy said the recovery in output occurred much faster than Capital had anticipated as GDP returned to pre-virus levels in Q3. And while the RBNZ was forecasting a renewed decline in output in the first half of this year, recent data suggest GDP has continued rising. Second, most measures of underlying inflation surged in Q4. All of them are now close the RBNZ’s target mid-point of 2% in its 1%-3% range.

"Third, the housing market in New Zealand is running red hot. House prices are up nearly 20% from a year ago and show little sign of coming back down to earth. The surge in house prices prompted the Minister of Finance to write to RBNZ Governor Adrian Orr suggesting that house prices be added to the Bank’s monetary policy mandate. While the Bank rebuked that suggestion, we doubt Orr would be keen to exacerbate these political tensions by cutting interest rates further."

Udy said that Capital's forecast of a rapid recovery in output means that it expects the unemployment rate to decline to around 4.5% by the end of 2022, consistent with employment being above its maximum sustainable level. Taken together with their forecast that underlying inflation will remain close to the Bank’s target mid-point, "we think the [central] Bank will turn its focus to policy tightening before long".

"The Bank’s first step would be to wind down its asset purchase programme, which foresees $100 billion in government bond purchases by June 2022. We suspect the Bank ends purchases around the middle of this year which, would probably mark a total of $60 billion of bond purchases," Udy said.

"We doubt that would cause GDP growth to slow markedly or prevent progress on the Bank’s inflation or employment targets.

"By the end of 2022 we expect inflation will have been around or above target for nearly two years and that employment should be above its maximum sustainable level.

"On that basis we expect the Bank to begin hiking rates at the end of 2022. We’ve pencilled in three rate hikes to 1.0% by the middle of 2023.

"As things stand, that would make the RBNZ the first central bank in the developed world to lift interest rates following the virus outbreak."

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Global economics research firm Capital Economics has doubled down on forecasts made only a week ago that the Reserve Bank will be the first advanced economy central bank to hike interest rates - and it now additionally sees the RBNZ ending its quantitative easing (QE) programme by the middle of THIS year.

NZ 10 year government note prices a 1.04% yield, same as the US equivalent right now.

" . . we expect the Bank to begin hiking rates at the end of 2022 . . . "
Another seeing likely upside to the OCR in the medium term.
For those with large mortgages I would be paying the down principal as much as possible with a seeming likelihood of possible future rate increases.
For those rolling over existing mortgages, although rates are likely to be lower in the short term, if rates are attractive there could be reason for fixing longer than a year. Whatever, if rolling over now and the rate is lower than currently, then I would continue paying the same using it - along with any spare money - to pay down the principal.

Agreed P8, if the rates are favourable I'd go as far as fixing for 5 years if possible, and paying the maximum allowable in extra principle payments plus paying mortgage off at least fortnightly if not weekly(as opposed to monthly). If your bank isn't keen - find one who is

That only works if your income is fortnightly or weekly. Otherwise you'll just have money sitting around in a cash account waiting for the next fortnightly/weekly payment. If your income is monthly then you're best to pay your mortgage monthly.

Talk with your banker / mortgage broker.
See if it is possible and worthwhile to have a small amount of your mortgage on revolving credit. Agreed money sitting in any form of savings or cash account is not going to be earning interest.
While the revolving credit will have a slightly higher rate, immediately your pay goes in your daily balance goes down. No need to have a cash account with emergency cash or for irregular spending - you can draw on it your available credit.
The biggie is that having part of your mortgage on revolving credit is that you have the ability to clear your credit card bill monthly - yeah, your revolving credit may be 4% or 4.5% but that is a hell of a lot cheaper than credit card interest at 19%.
And while 4.5% may seem high, your pay and spare cash not immediately required is effectively reducing your principal so effectively reducing your net interest cost.
How much of your mortgage should you have in a revolving credit account? Depends on ones situation but $15k to $20k should cover variations in spending and emergency cash.

P.S. You can call me a parasite who never pays interest on their credit card. Had a small revolving mortgage in my younger days . . . never had to pay credit card interest in over 40 years, never had to worry about buying anything on credit, never had to take out car dealers rip off credit, never had to worry about being able to afford or over spending on holiday . . . and yes everything - and I mean everything - I spend goes on the credit card, clear it monthly so never pay interest, and get all those Airpoints/Flybuys etc which are now pretty attractive and cover my annual car fee at least 30 or 40 times.

printer8, of course I already do that (income paid into revolving credit). Likewise for credit card.

My point in the comment above though is that, mathematically, it's best to align your fixed loan repayments to the same schedule as your income. Otherwise your excess income is just sitting around waiting for the next payment when it could have been paid sooner, reducing the loan interest. That's assuming you don't have other debts.

As for revolving credit, it depends on how you manage that. If you don't "use" the balance (owe nothing) then my comment about aligning fixed loan payments with income still applies. On the other hand, if you've use a lot of the revolving credit (owe money) then of course you'll want your excess income to sit in that account for as long as possible due to the interest rate differential.

So what you're actually saying refacternz, is you don't have the financial discipline to budget fortnightly or weekly payments out of your monthly salary?. Do the maths and you'll find that by paying weekly you gain an extra "monthly" payment each year. It's not Bitcoin level gains but it's a gain nonetheless. You also seem to be missing the fact that your weekly payments are in fact saving you your mortgage rate for each payment - but hey .. you do what you want.

Hook, I assure you I've done the maths.
If you put *all* your excess income into loan repayments then it's best financially for those payments to be made as soon as you receive the income, not have it sitting around for weekly disbursements.

You didn't mention you were making extra principle payments over and above the required ones.. in which case you might be right. If you're just making the required monthly payments then it is better to work out the annualised payment, divide it by 52 (or 26) and pay it that way. Ideally you pay the same amount on the last payment as you did on the first for the year, without any reduction, i.e. fixed payments
One other thing - if you're paying monthly you make 12 payments, fortnightly you pay 26, and weekly-52. You see where the advantage is?

By that token you could pay daily and save even more interest. But the point that I'm making is that unless your income is also paid daily then you're having to withhold some of your income in order to make those daily payments whereas you would actually save more interest by paying them all at the time that you receive your income.

Once you break it down, what you're really saying is, "Make extra payments". That could be done as a weekly or fortnightly schedule as you suggest, or it could be done as soon as you get extra money for maximum effect, i.e. aligned with your income schedule.

You're not quite getting it all but admittedly the general gist. Also interest on your loan is calculated monthly - before you make that months payment, so by paying monthly you pay the months interest first then principle out of what's left (if it's a fixed payment). Obviously you can't pay daily but yes the idea is the same if you could. There's no right or wrong way but having paid a few mortgages, I'm convinced of the benefits. Each to their own I guess.

Oh I absolutely do get it, and your method will help some people who don't understand finance or who can't budget.

You are saying:
Make more regular payments (to reduce compounding interest).
On it's own that's great advice, but it's a simplistic view.

I'm saying:
If you want to save maximum interest, then pay the maximum amount you can at the time that you receive it. You can't do better than that. So it's best to synchronise your loan payments with your income schedule.

I think your confusion comes from thinking that monthly payment means holding the cash for a month then paying it. Obviously weekly or fortnightly payments would be better than that. But I'm actually saying, pay it all as soon as you get it. Mathematically you can't beat that (unless you're investing and earning a higher return elsewhere, but that's a different topic).

Also, interest is not calculated monthly. It's calculated daily but (usually) applied monthly.


Lol yeah.

Paying an extra five grand off that 850k+ mortgage you are proudly bag holding is totally going to save your bacon when mortgage rates rise.

Pearls of boomer wisdom.

5K is 5K Brock. Noone is forcing you to attempt to help yourself, it's merely some advice given in good faith. 5K is less than $20/day - 10K is less than $40. If you can't find an extra 20-40 bucks a day you are well over committed, imv
BTW.. 5K pa over a 20 year mortgage is still 100K - hardly chump change
Dismissing valid advice from people who have paid down several mortgages (in my case none were rentals) with your rather insulting riposte does you no favours in the credibility stakes


Given the likelihood of rate increases, just forgoing the smashed avocado and lattes to get that principal down from 850k to 845k is going to make a big difference! A whole 0.6% difference in fact!!! You're still f*****.

This paying down principal boomer logic made sense when interest rates were higher and loans much smaller.

These days it's just pissing in the wind. When interest rates rise on somebody holding that much debt heaven help them.

No problem mate. You do what you want.
Rolling over your mortgage, 1% less on $850k mortgage is $8.5k per annum - about $326 a fortnight, that's a saving of $326 after tax income.
When rates go up 1% more, then on $850k then the increase is $8.5k per annum that an additional $326 a fortnight after tax income - or $11.3k of pre-tax income per year or $430 per fortnight at your marginal 33% tax rate.
Clearly you aren't going to bother thinking about it, but others will appreciate that if your mortgage interest goes down 1% this year, put that $8.5k for one year into paying your mortgage down . . . and doing so for a year will save you $11.3k / $430 per fortnight pre tax income year after year, after year after year after year - just for putting that windfall in for one year only.
That will be the equivalent of $113,000 of pre tax income over 10 years - wow, great to know that is a nothing to you. In fact no wonder you gripe on about housing affordability - all about money management son.

The Achilles heel in your argument is "This paying down principal boomer logic made sense when interest rates were higher and loans much smaller".
The issue now is that while interest rates are exceptionally low, mortgages are exceptionally higher . . . so 1% means a hell of a lot more now than it ever did in my day.
I am really beginning to understand why you gripe on about housing affordability - the 150,000 FHB over the past two years have got their sh*t together regarding money management.
Really can't understand how you can defend not putting the windfall of 1% reduction in your mortgage for just ONE year which is going to save you $11.3k pre tax income year after year after year . . . $113,000 pre tax income in ten years. Simple basic astute money management; nothing to do with any other logic - boomer or otherwise.

I don't disagree that paying down debt is a good idea. What I disagree with is that it's going to make a tangible difference on a high six figure mortgage with the prospect of interest rate rises in the next few years.

Back in the boomer days of much smaller mortgages and higher interest paying down some extra principal had a big effect, absolutely agreed, these days it's going to amount to two fifths of F.A. on your exposure to interest rate increases.

Please share with us your "understanding" on why I "gripe about housing affordability". This should be good for a laugh.

Brock.. 2 things, what do you call a "tangible difference" and why do you think 100+K (as explained by P8) is "intangible?
As P8 explained - if you can repay even 1% earlier than forecast (pa) that surely covers you for up to a 1% rise in interest rates.
But as P8 also mentioned - you do it your way

Feels like I'm explaining basic numeracy to an innumerate person today.

I have a loan of $100. Mortgage rate is 2%. My interest costs are $2. I repay $1 of principal. My interest costs are now $1.98. Except rates are now 3% this year. Thanks to killing myself with repayments my interest charges are now $2.97 instead of $3.00. If rates increase again I'm stuffed regardless of the extra payment.

Surely covered or still utterly at the mercy of interest rates no matter what?

Most banks are picking interest rates will remain benign for some time (certainly unlikely to triple for possibly the next 5 years at least) As for "killing yourself with repayments" I think that is just dramatic licence. Either way the logic is sound that P8 and myself have been trying to explain to you. Remember the advice revolved around paying an EXTRA 1% over and above the required repayments.
As for being at the mercy of interest rates - that's just a fact of life when you are at (or near) the bottom of the cycle but it's how you deal with or protect yourself going forward from the inevitable increases that matters.

It should be remembered that CE have made some pretty wild forecasts previously - NZ in recession for 3 years, NZ/US @ 50c, unemployment at 10+%. Roger Kerr seems to be saying - treat their forecasts with utmost caution.

And I treat his with caution given track record...

To be fair Fritz.. I think Mr Kerr has immeasurably more experience and qualifications than you do - but you follow who you want

Cheap shot mate.
Have you actually cared to follow his forecasts over the past few years? They have often been wildly out.
If only high experienced 'experts' could offer opinions on this website then that would count many of us out from commenting on most things.
Before he calls out others for their inaccuracy he should look at himself.
You need to read some Taleb.


They won’t be raising rates if it tips over mortgage holders. They are well and truely boxed in a corner. Their true mandate is upholding the property economy.

They will if inflation starts to kick in. If it affects mortgage holders (which it shouldn't given the FLP) there might be some "please explain" letters going out to banks who grabbed the FLP with both hands. Higher interest rates would possibly have a cooling effect on the housing market anyway - no bad thing.
Of course then we'll hear the cries from the whinge and whine brigade about how unaffordable mortgages have become due to increased rates

They will 'see through' moderate inflation and look to employ other measures.
As you say they are boxed in to a certain extent.

Necromancy!! Stop consulting the spectre of John Maynard Keynes.

Hilarious. ‘Experts’ still not willing to accept that, in the current climate, Govts and their pet banks set the interest rates and therefore rates of inflation.

Nothing to see here. On their website they proclaim that they are highly trusted by a list of corporations. That list of corporations consists of all banks and 1 hedge fund - broker cum ETF, ETN underwriter hybrid.

Even if interest rates rises, it's only a couple of dollars more and cost transfer to your tenants are easy as. There's zero impact on existing landlords.

CE's projection and justification are standard textbook answers browning bank shoes. I was once told if "you had studied economics for 10 years, you had wasted 8."

Over the long term rates only go one way in New Zealand and that ain't upwards.

Another wishful wishy washy, nope.. look around in every major NZ cities, plenty closure in CBD area is the prominent one. Govt have shifted the unemployment mandate to RBNZ. The current sugar rush still in the system for many, eventually they need to top it up. So more of those govt. flexi wage subsidy to be upped and make them permanent, after all the renters must pay, the landlord must pay.. to the ultimate, do not touch bank cartels..and where the govt. get that money from?... enter RBNZ.

This truly highlights the absurdity of our society at present.

Property investment and business are being propped up by the government, yet we have a bunch of beneficiaries of this who regularly attack the poor for receiving benefits. A distinct lack of self-awareness.

Yawn. 2011 and 2014 all over again

Notice how the RBNZ for the last 3 years has surprised every economist and market commentator with their policies? And it’s been foot to the floor bearish.

They were considering QE prior to COVID and cutting rates despite a rising market.

Nobody’s stopped to ask why

Yup boxed into a corner. If inflation rises. Curve control and inflate debt away like they did in world war

I have a lot of loans and as they roll over I have been splitting between 1 and 5 years. I've also been moving more and more to P&I. Whatever comes I want to be ready for it.

I would not be surprised at all if we saw an OCR al 1% by end of next year at the latest, and an OCR at or above 1.5% by middle at 2023. Actually, the risks are on the upside, in my opinion.
At such levels, the monetary policy would still be extremely accommodating. In the last few years, the RBNZ has often surprised on the downside; many may well discover that the RBNZ will be equally prone to surprise on the upside.

The first Central Bank in the world ever to unwind a ponzi. I've got a bottle of Moet that says an OCR of 1% is not going to happen. Where have you been since 2008?