Westpac Chief Economist Dominick Stephens forecasts OCR will rise to 6% by late 2013 and says now is time to fix

Westpac Chief Economist Dominick Stephens forecasts OCR will rise to 6% by late 2013 and says now is the time to fix; NZ decoupling from soft global economy. Your view?

Westpac Chief Economist Dominick Stephens has forecast New Zealand's economic growth rate will rise to 4.5% next year as low interest rates, high export commodity prices and stabilised house prices boost activity and inflationary pressures.

Releasing Westpac's July Economic Overview, Stephens also forecast this growth and a ramp up in Christchurch reconstruction would be factors forcing the Reserve Bank to put up the Official Cash Rate to 6% by late 2013 from 2.5% now. This is significantly higher than the bank itself, markets and other economists are forecasting.

Although the Reserve Bank was unlikely to start raising the cash rate until December, it would then raise it quicker than the market and other economists expected, he said. See what all other bank economists expect here at The Crystal Ball.

“The economy is responding to low interest rates, high export commodity prices, stabilising house values, and better agricultural growing conditions," Stephens said.

Westpac expected growth to reach 4.5% in 2012, as Christchurch reconstruction activity ramps up, and as business investment picks up after a period of underinvestment, he said.

Stephens acknowledged the global economy was entering a soft patch, but the New Zealand economy had 'decoupled' and entered a 'self-sustaining' recovery.

“Central banks in Asia are determined to cool their overheating economies. Ballooning government debt is taking a toll in the United States and Europe. And New Zealand’s tourism sector could soon feel the effect of plunging consumer confidence in Australia," Stephens said.

“It is not that unusual for New Zealand growth to “decouple” from the global cycle in this way. In 2001 and 2002 New Zealand enjoyed high growth while the global economy merely puttered along. And the tables were turned last year, when we languished while the global economy steamed ahead. Being small, the New Zealand economy is sometimes buffeted by idiosyncratic developments such as local climatic conditions," he said.

Economists generally expect the Reserve Bank to leave the OCR on hold on Thursday in its statement due at 9 am, but they expect some comments about the high currency and the prospects for a rate hike later this year.

“We don’t expect the Reserve Bank to begin raising rates until later this year, but we do expect a reasonably large OCR cycle," Stephens said.

"We are forecasting the OCR to rise by three percentage points over the course of two years. That’s more than markets are currently pricing in, meaning now is a good time for borrowers to fix their interest rates," he said.

Here is more detail from Westpac's overview below:

We see two factors that could leave the RBNZ cautious about earlier tightening. The first is that the New Zealand dollar has soared to new post-float highs (see below), which will directly help to contain inflation. Moreover, the RBNZ has a historical tendency to delay OCR hikes on the grounds that higher interest rates would cause a further unwelcome appreciation of the exchange rate. The second factor is the gathering clouds around the global economy (see the International Outlook section).

Australian consumers’ loss of confidence could hit the NZ tourism industry, and slower growth in China and India could hurt commodity export prices. Most importantly, financial markets’ concern about the impact on European banks of the inevitable debt restructure in Greece (not to mention worries about the long-term solvency of bigger countries like Italy), has caused a squeeze in credit markets that is being felt worldwide.

Credit default swap (CDS) spreads for the Australasian banks have risen to their highest level since May-June last year, when Greece first required a bailout. spreads remain high for long, bank funding costs could rise, leading to a de facto tightening independently of the RBNZ, as seen in 2009. Barring any reversal in these two factors, we continue to forecast a December rate hike, later than the Sep-Oct start that the market is currently pricing in.

The real point of difference in our forecasts remains in the extent of the tightening cycle. The RBNZ’s most recent projections suggested an OCR peak of around 4.5% by early 2013; market interest rates, despite the more aggressive near-term profile, imply a peak of around 4%. We expect OCR hikes to continue through 2013, reaching a peak of 6%. We have long been sceptical of the idea that the ‘neutral’ level of the OCR has permanently fallen in the wake of the global financial crisis.

Notably, the RBNZ’s assumption of a lower neutral rate was partly based on a sense that a 2.5% cash rate was providing less stimulus than expected; the latest GDP figures (including upward revisions to history) test that logic.

Secondly, on our forecasts, Christchurch reconstruction activity will see the NZ economy running above its long-term potential for an extended period. That implies some monetary rigour will be needed just to keep average inflation near the upper bound of the 1-3% target.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Ocr at 6%.....yes highly likely...the key causes are the current low rate and the beast being let out to roam free. Savers who bought risky corporate bonds offering 7 to 8% maybe payments with no guarantee will not be happy...those who stayed short term are about to reap the rewards of higher returns and if the banks don't offer these, then the money will depart, going to those who will.

I also think that rates will go a lot higher. Inflation is getting out of hand and needs to be dealt with, the reserve bank does not set the OCR based off the NZD exchange rate.

Most people believe that higher rates = a higher Kiwi dollar - but this is a fallacy. The correlation between Kiwi and US interest rates and the NZD/USD show that there are many times where we have had high interest rates in NZ and a low Kiwi dollar. What matters more is whose economy is growing the fastest, if the NZ economy grows faster than the US, then the Kiwi dollar rises.

So in fact higher rates will mean slowing the NZ economy down, which will in turn eventually trigger a fall in the NZD exchange rate.

With rates at historical lows, and the economy rebounding, the Reserve Bank have little reason to not hike rates. Yes there are global risks, and should the world turn pear shaped, people will sell risky assets such as the Kiwi dollar, which will drop our Fx rate like a stone, which is good for exporters and the economy. So no matter what happens, there seems little downside risk to raising rates. If you are a saver this is good news, if you have a massive debt, then probably not such good news.

"Savers who bought risky corporate bonds offering 7 to 8% maybe payments with no guarantee will not be happy"

Wolly, the 7 to 8% has been feeding me for the past few years while I patiently wait for the rates to rise. 

Cant leave it all in the bank at 4%.

god I hate economists - make it up dominick and scare the hell out of them!!!!!  for years we're told we're tied in to the world economy and we are but a little country buffetted in the sea by stronger powers than us and now all of a sudden the economic power house that is NZ has "'decoupled' and entered a 'self-sustaining' recovery."  self-sustaining being based on 0.8% growth over a minute period, a hot AKL housing market (only AKL and no where else) and high export commodity prices (for now - how long is that going to last for gods sake).

heres a prediction for NZ, the power horse in the world economy (apparently), negative growth over the next year as global economic factors impact NZ, a major popping of the AKL housing market following on from the popping of the Aust markets and a substantial fall in NZ export commodity prices resulting in the ocr not going over 4% by the end of next year and then heading down again.  whatever we hear about 2.5% being a "historically" low rate it is not a low OCR - that is what the US has!!!!!  it is "historicially" low for NZ over the last 20-yrs but 20-yrs is not a long time

I would say "decoupled" is the wrong choice of words. We are coupled for sure, to the high commodity prices which result from a surgent Chinese and Indian middle class which is creating huge demand for the things that NZ produces. NZ's export base is well diversified, which mean that the problems in the USA and Europe affect us less than they would have 30 years ago.

Add on top of that all the reinsurance inflows into NZ from th ChCh quake. Studies have shown that natural disasters are actually good for a city's economy in the long run - think of all the job creation going on there.

The Chinese have been saving and building wealth for years and years, so assuming the rise of China is not a temporary blip, NZ is in a good position and will be for years to come. There are always risks out there, but they can be dealt with as and when they occur.

Here’s the problem.  We have a split economy, in fact, a fragmented economy.  For example, Auckland, quite a strong economy, and possibly continue to remain strong for some time even ‘though the government will have to redirect previously assigned funds away from Auckland to the Christchurch rebuild. 

Wellington subdued and possibly shrink a little as various Government ministries budgets are tightened. 

Christchurch, timing to be determined, could be flush with funds as the rebuild picks up steam. 

Other regions shrinking or growing, but you get my point. 

So what does this mean in general? 

I think the RBNZ is restricted in what it can do.  If it raises the OCR significantly it could effectively squash some areas of the economy that are barely recovering (not directly because of a high OCR per se, but by a high NZ dollar). 

If the RBNZ delays raising or doesn’t raise the OCR sufficiently, then it won’t fulfil its mandate to contain inflation.

My gut feeling is that the OCR will not need to be raised by much to cool off the economy in general.

I'm with hobo. The world is about to have some more serious issues and there are not many positives out of that.... OCR is not rising for a while if this eventuates..

Hobo - I'm not quite with you on Auckland being "quite strong"

Retail and hospitality is struggling, building and construction struggling, manufacturing must surely be struggling with the growing strength of the dollar, tourism struggling

Sure things aren't terrible here in Auck, but I'd describe them as "sluggish" rather than "quite strong"

Please elaborate on the strength you see in Auck


Sorry for the (very) late reply Matt. 

I think Auckland is arguably the strongest region of NZ overall. 

I do agree there are sectors in Auckland that are struggling – they may be okay for the moment (world cup and Christmas), but fall flat again next year.

"Dominick Stephens forecasts OCR will rise to 6% by late 2013 and says now is time to fix." 

But Dominick, if we banned fixed rate loans, or allowed RBNZ to adjust the principle repayment rate* of fixed rate loans, would the OCR need to rise as high as 6%?

Who would benefit?

Who would not benefit?

Would NZ benefit?

Cheers, Les.


*monies held on account until roll-over.

God I hate economists, they have a terrible track record of predicting 3 months into the future yet proclaim they know what will happen in two years.

The one thing that is for certain is that we live in interesting times, should our $NZ continue with its bull run at some stage we will loose exports and our economy will stagnate. An economy going no-where equals cheaper interest rates in the future to stimulate growth.

Personally if I was saddled with mortgage repayments I wouldn't rush into fixing because if America defaults on debt repayment on August 02, the world economies will likely turn to temporary chaos, and that means more money printing and continued low interest rates.

I agree with your opening comment. Personally I believe that that this prediction may prove to be more accurate than many think. One way or another rates are going up, its a question of when and how much....people can't seriously believe that it won't happen!

So much BS in all media be it financial or current affairs etc, no wonder it's hard for people to believe anything they hear.

Does this mean people should fix is up for debate. Again I personally doubt it will matter!


the economists seem to be giving little attention to the NZ dollar, as you say if it keeps strengthening surely there will come a time when we see a few exporters go under, jobs lost etc. In that sort of economy we are unliekly to see rapid hikes in the OCR  

RB: it's not just the economists: it's also the clowns who give them oxygen.

One simple solution is this: Some months back it was suggested to the head sherangs around here that they run a continuous "predictions page" and every time one of these predictions arise, it is entered into the "page of predictions", and held there forever so we can all have a laugh. Do you think it got a response? As it stands now, by 2013 everyone will have forgotten. But it makes good copy and fills a hole in 2011.

Good idea!

Pip pip, a rather blooming good idea, what! BH would you consider this my dear man?

So this excited analysis has popped up because of the latest good growth figures?!  These guys change by the day.

I say 4.02% by March 3, 2014.  Just because I say so.

6% really? Can't wait. At least savings might keep up with inflation then.

The soaring NZ dollar will do the job instead of interest rate rises. My prediction is that there will be no need for any rate rises in the immediate future. - I'm not an economist :-)

I'm loving the fact little ol' NZ is resistant, nay bullet proof, to to global cash showdown and the wild waves of the tsunami of world financial woes... probably time to buy that little rental investment in Auckland...

They aren't making any more land in Auckland as we all know!

Until the next volcano erupts!

5% chance of an eruption in the next 50 years.  At 600+ years since the last 1 in 1000 year event, more land could be available in Auckland anyday!

Have you added this comment as a joke or....why?

A humorous observation SK.  Volcanoes make rock and rock makes land.

But seriously would it be wise to put all of your financial assets in one location which has a high probability of unimaginable catastrophe in the foreseeable future?  The chances of an earthquake destroying ChCh were apparently low prior to Sept, much lower than the chance of a major (8+) quake in Wellington or a volcano in Auckland. 

Property is a great asset provided catastrophe doesn't happen, now we see in ChCh that probably the most important part of property investment is the insurance - if you can't get it, your asset can be worth nothing.  Just imagine a volcano erupting on Dominion Rd and ash and lava deposited across most of central Auckland all the way from Blockhouse Bay to Princes Wharf- it's not far fetched and it's a near certainty that an eruption will occur in the lifetime of many buildings (and even trees!) that currently occupy the Auckland skyline.

Considering the scale of the last event (Rangitoto) at around the time King Henry IV was fighting Owen Glendower, I would have to say that I would rather experience a M8 in Wellington than a volcano (although I wouldn't want to be in Wellington's CBD at the time).

It is rather bizarre that when in 1855 a M8+ in Wellington levelled all but single level timber buildings, that a quake with severe shaking in ChCh didn't even do that scale of damage to the same era timber buildings yet wrecked the vast majority of modern high rise buildings.  So what hope is there for Wellington's CBD?

The safest bet sounds extreme but it is probably to phase out expansion in both Auckland and Wellington - warning people of the risks could be one way to limit price inflation in both centres.

exactly what I said SK... property in Auckland is only to go up, up, up as the wealthy flee a collapsing US and EU... and China continues to produce bazzilionaires who want to invest outside the slums of Central Governments new built cities... and Indian businessfolk who want out of the escalating violence in their country and rich Africans and Middle-Easterns flee drought and global warming and war. And and and, I could keep going all day on this! It's going to be a boom in the bestest way - and you're the only other person on to it, good man!

I say if you can get it, get it! NZ after all can weather any storm, just like that paint they advertise on the telly... we have a vaneer that protects us from the muck what's hitting the fan that is the financial world!

Actually no, It won't go that way. Hard to tell if you were being serious , seems you were.

Little Nz , while being the original experiment , & seemingly protected to a point thus far , will take it's place in the queue of defaulting sovereign nations. Will that still mean we have been protected ?

There are a small number on these blogs who understand the events , what they are & why.

um, like excuse me LloydM1.... I think you'll find this is Nu Zillan', NU ZILLAN! and we have this wonderful thing called the "middle-class" and these people who other than being massive bludgers of the system (and frankly I wish they'd all just bugger off) are also able to be squeezed and squeezed until they cough up more dosh. This means the dictators by democracy in blue will be able to keep squeezing this, this "middle-class" (said with disgust and disdain) to cover the wealthy tax breaks, trusts, investment properties and other self serving rorts, um errr I disn't mean rort, I meant something else....

There is no way in hell NZ will default, we have a middle-class, hear me a MIDDLE CLASS! And so long as the middle-class is here and boomers are flicking their properties to foreign investors we will be sweet. And sweet we shall be...

well said Mandalay, you are clearly a sharp fellow....

Sounds like the Friday afternoon drink-up is off to an early start at your place Mandalay.

sigh, if only... was trying to be, as someone said to me the other day, 'ironical'....

Real Estate agent SK said:

"They aren't making any more land in Auckland as we all know!"

Congratulations go to SK on officially scraping the bottom of the property spruiker 'desperate quote' barrel.

The soaring NZ dollar will do the job instead of interest rate rises. My prediction is that there will be no need for any rate rises in the immediate future.

I agree and RBA express the same view..  Australia dollars will come down when interest rate goes down... then inflation will follow.

Dominick getting over excited again. OCR will never reach 6 again until the entire global financial system collapses fully and we get the EU running the world...