Westpac economists have responded to the latest labour market figures that show strong wage increases by raising their forecast peak for the Official Cash Rate from 3.5% to 4%.
And the Westpac economists, like economists at the ANZ, expect that a 4% peak will be achieved by the Reserve Bank (RBNZ) hiking the OCR by 50 basis points at each of the remaining reviews this year (next month, October and November). The OCR is currently at 2.5%.
If that is what happens it will mean six consecutive hikes of 50 bps by the central bank, and a total of 325 bps this calendar year - which will easily be a record rise for the OCR in a calendar year. In fact we've already seen a record rise so far this year as the previous biggest rate hike in a year was just 150 points way back in 2000. The OCR was first introduced in 1999.
In its May Monetary Policy Statement the RBNZ forecast the OCR peaking at just under 4% by the middle of next year. At the time most economists had been of the belief that the central bank would not need to go as high as that, but views have been gradually shifting. And the first of the major bank economists to forecast 4% by the end of this year were ANZ.
ASB economists forecast a peak of 3.75%, BNZ economists see 3.5%-3.75% and Kiwibank economists 3.5%.
Current pricing in wholesale interest rate markets is pointing toward a peak OCR of a little over 3.8% by early next year.
Westpac acting chief economist Michael Gordon said the June quarter data showed that the New Zealand labour market remains extremely tight.
"Setting aside a slightly higher than expected unemployment rate [of 3.3%], the details point to an economy that’s running up against capacity constraints, and the upward pressure on wages is intensifying," he said.
"We now expect the Official Cash Rate to reach a peak of 4.00% for this cycle. That can be achieved through 50 basis point hikes at each of the three remaining review dates this year.
"There is a risk that the tightening stretches out into the early part of next year, although we think that by then there will be a substantial body of evidence that the domestic and global economies are slowing."
Kiwibank economists - chief economist Jarrod Kerr, senior economist Jeremy Couchman and economist Mary Jo Vergara - in their review of the labour market figures, reiterated that they expect the RBNZ to deliver another 100 bps of tightening to 3.5% in this cycle.
"The risk is clearly higher, however," they say.
"We will review our forecast following the RBNZ’s August monetary policy statement.
"The RBNZ may choose to ignore the crisis in confidence, with both business and consumer confidence at recessionary levels, and plough ahead with rate hikes to 4% (or above). The RBNZ is resolute in the need to tame the great inflation beast. And the only way they know how, is to lift interest rates.
"We remain wary of the risk of overtightening.
"The RBNZ has had great traction in the rates rises thus far, with mortgage rates more than doubling from the lows of last year. Most mortgagees roll off fixed rates this year, and onto much higher mortgage rates.
"We expect the rampant rise in interest expense to have a significant impact on household consumption. Indeed, we are already seeing some signs of belt-tightening in our spending tracker."
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"The RBNZ is resolute in the need to tame the great inflation beast. And the only way they know how, is to lift interest rates." They may not be alone.
The Bank of England will on Thursday be forced to admit that inflation will remain high for far longer than previously predicted as it increases interest rates for the sixth time in a row....
From The Daily Mail:
Bank of England is set to make biggest hike in interest rates for 27 years to 1.75 per cent tomorrow as experts warn inflation could hit 15 per cent
The level of stupidity is reaching new highs.
We have a central bank that thinks increasing the cost of living is the best way to reduce the cost of living, economists that think the solution to high international oil prices and a mismatch between jobs and available workers is to throw more kiwis on the dole, and politicians competing to show how ignorant they are by spouting simpleton reckons on Govt spending being automatically inflationary.
Jobs in NZ *reduced* by 18,000 (net) between 2022 Q1 and 2022 Q2. Construction saw a reduction of 12,500 jobs, despite that sector only accounting for about 8% of jobs. Hotels and hospo saw a reduction of 10,800 (nearly 1 in 10 jobs gone). Thankfully education is hiring - they added 13,000 jobs.
HM the residential construction sector is already in trouble, 18% increase in building costs is killing it anyway. People have had plenty of advanced notice now to re-fix their mortgages and if you have not seen this coming by now you have been living under a rock.People can handle 6-7% rates eventually if they kick the can down the road.
You don’t need to tell me it’s in trouble, I know that as I work in and around the sector and predicted it from early 2021.
It will be in much more trouble if interest rates hit 6.5-7%. Watch pre-sales on multi unit developments get absolutely slaughtered if interest rates go that high.
it will be 2023 before things get *really* ugly for residential construction
But we also though the solution to deflationary forces caused by globalisation was to lend more and more money domestically as debt against a property bubble.
So is the stupidity happening now - or has it just happened for the past 20-30 years and is coming to an end?
I would say 50 years - the point at which the Chicago school took over with their monetary policy reckonomics.
I seriously hope that the whole charade is coming to an end. I get optimistic the more commentators in NZ recognise that poverty and involuntary unemployment is a feature of our economic system not a bug.
I reiterate what I have said multiple times before and since the end of 2021, NZ will be in a deep recession in 2023! Hold me to account in 12 months from now. There is going to be too much money sucked up by rising mortgage interest payments for people to buy goods and services, this will lead to business closures and redundancies. Our main problem is the DELAY in seeing and reporting the effects the current OCR rises have on the economy (that's why it will hit us in 2023). House prices will also correct substantially!
Such a gloom goblin Yvil - you really should lighten up (sarc)
But then again - if anyone who wasn't a property spruiker would suggest such a thing might happen in the past, then we legitimately were a doom gloom merchant in the eyes of the spruikers which seems odd.
For the purposes of consistency - I hope the spruikers now label you a DGM and tell you that you have no credibility to make such bearish remarks about our economy and property market.
If they don't, then all that has been happening in the past was a form of tribalism where property spruikers were grouping together and attempting to silence people who might scare people away from buying into their money making financial ponzi.
Agree. And there will be a massive impact on the residential construction sector ( which will have big flow on effects through rest of economy).
Selling 2 bedroom shoeboxes at 800k with a mortgage of 700K at 2.5% interest rate is one thing, trying to sell same shoebox at a 6.5-7% interest is quite another…
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