Economists at the country's largest bank are warning that rising mortgage rates could make the housing market "flip more abruptly than expected" from a support - to a drag - on household spending and construction activity.
In a Forecast Update following release of the latest super hot inflation figures this week ANZ economist Finn Robinson, chief economist Sharon Zollner and senior strategist David Croy note that the "dramatic increase" in wholesale swap interest rates earlier in the week "was so large there is real pressure for mortgage rates to rise further before long".
"This increases the chance that housing market momentum could turn more sharply than forecast and flip more abruptly than expected from a support to a drag on household spending and construction activity," they say.
"And globally, a reassessment of the likely average cost of borrowing over the next few years poses a challenge to asset valuations that underpin household wealth."
They also note that the longer Covid restrictions in Auckland drag on, the greater the risk of a hit to firms’ investment and employment plans – "though so far, they’ve been remarkably robust".
"All up, it is far from a given that the wheels will stay on the bus while the RBNZ steadily increases the OCR [Official Cash Rate] for the best part of a year."
In the wake of the inflation figures, the ANZ economists have changed their OCR forecasts.
They've added in 25-basis-point hikes in the April and July Monetary Policy Reviews, "in addition to the hikes we were already forecasting at the next four MPSs [Monetary Policy Statements]".
"This new track sees the OCR reach 2% in August 2022."
But the ANZ economists are continuing with their cautionary view that something could go wrong in the meantime that will force the RBNZ to re-evaluate the interest rates picture.
"It is important to highlight that although we are raising our central OCR forecast, we still think there is a significant risk that something happens to derail the hiking cycle before its completion," the economists say.
"Indeed, these risks are intensifying, if anything."
The economists have also updated their inflation forecasts.
"...Inflation pressures are likely to get worse before they get better, and we now expect inflation will peak at 5.8% [year-on-year] in the March quarter of 2022."
The ANZ economists note that 'short-end' wholesale interest rates aren’t far off pricing in their new forecast, with an OCR of around 1.92% priced in by August, "by which time we expect it to have reached 2.00%".
"Given the intensity of medium-term inflation pressures, we are now forecasting the RBNZ to take every opportunity it gets over the next while to raise the OCR.
"In short, the very strong inflation pulse has taken away the luxury of time and caution, as the OCR has more work to do.
"...We estimate the OCR needs to go to around half a percent above neutral, which we estimate to be around 1.5% currently. The RBNZ estimates neutral to be 2%, so we expect the November MPS will show the OCR rising steadily to around 2.5% or a little higher."
The economists note that supply chain disruptions have been a key driver of prices over the past year, and as the Christmas rush builds, these pressures are likely to get worse over the next few months.
"More concerning for the Reserve Bank is the steep rise in measures of core inflation. It’s still highly uncertain how high and when exactly inflation will peak – but it’s very clear that more needs to be done to get ahead of the inflation curve.
"...We continue to expect that inflation pressures will moderate in time. Supply chains should eventually adjust to the post-COVID norm, and in fact we’re forecasting tradable inflation to dip into negative territory as price levels normalise. As the RBNZ removes monetary stimulus from the economy, domestic inflation pressures should also ease."