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Bernard Hickey remembers 2009 and is sceptical that the RBNZ will actually raise interest rates in 2014 - especially as inflation remains so low

Bernard Hickey remembers 2009 and is sceptical that the RBNZ will actually raise interest rates in 2014 - especially as inflation remains so low
What will he do? What should he do?

By Bernard Hickey

It's the surest of sure things, says every economist.

Interest rates will rise more than 2% over the next two years and therefore now is the time to fix your mortgage to avoid the pain.

But borrowers with longer memories will recall we've been here before many times over the last five years, and every time the prediction has been quashed by an unexpected event that meant interest rates didn't rise much, or at all.

Every December quarter since 2009 the Reserve Bank has forecast it would increase the Official Cash Rate over the next two years.

That forecast increase has varied between 0.8% and almost 3%, but an increase has always been expected.

The biggest scare was in December 2009 when the Reserve Bank forecast the cash rate would rise more than 2.5% to over 5%, suggesting variable rates of well over 8%.

Many economists recommended fixing for two years or more and many borrowers took their advice.

Some thought they were very clever and fixed for five years at more than 8.5%, fearing a return to 2007/08 level rates over 10%.

The Reserve Bank duly lifted the OCR to 3% from 2.5% in mid 2010.

The hike felt like a big kick in the guts of the economy and by the end of the year the Reserve Bank was already revising down its inflation outlook quickly. Europe's near-meltdowns of 2009 and 2010 dragged further on the inflation outlook.

The February 2011 earthquake in Canterbury was the excuse used, but the Reserve Bank's decision in March 2011 to cut the OCR back to 2.5% was the almost inevitable given the economy's failure to kick on and recover as expected.

Those who fixed in 2009 then had to either endure painful years of paying 2-3% more than variable rates or biting the bullet and paying big break fees.

Fast-forward four years and economists and the Reserve Bank are warning again of sharply higher rates.

This time, they say, is different because the economy is growing so strongly and inflation will inevitably increase unless the bank tightens.

'It's different this time' is one of the most dangerous phrases in the worlds of finance and markets. It should make anyone look at an accepted view with an extra big grain of salt.

Those who fixed in 2009 will be particularly sceptical.

Inflation is actually still very subdued.

Some think a Chinese financial meltdown or another European crisis could derail the global recovery, and there remain plenty of doubts about how New Zealand's heavily indebted households will cope with higher interest rates.

Longer term fixed rates have already risen sharply to the point where there aren't that many benefits to fixing on higher rates now.

Remember, fixing a mortgage is essentially second-guessing that interest rates will rise faster and more than currently expected.

Those who fixed on low rates last year are in a better position, but deciding to fix now is not the obvious winner that many portray.

It carries risks too. Just ask the fixers of 2009.

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A version of this article was published by the Herald on Sunday. It is used here with permission.

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23 Comments

Something the Reverse Bank also needs to consider , Bernard , is the effect of a rate hike on our dollar versus the $A ....

 

... already the crossrate between us and our most important trading partner is at a multi-year low ..... do we really want parity with the Australian currency ..... another kick in the guts to our manufacturers and exporters ....

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Gummy - don't make the mistake of not understanding that the market always looks forward. The market has around 2% of OCR hikes currently priced into swap rates, and has taken the NZDAUD cross higher over past months because of that i.e. the cross rate is already higher anticipating it. And yes, Bernard's quite right, there are no guarantees about whether 2% proves to be correct or not, it could be 3% or more, or equally if there's some global set back it could be nothing (assuming it occurs before March). The market will respond to whatever happens but for the moment if rates don't go up by more than 2% over that two year period, I don't see any chance of parity especially after the shock 0.9% 4th Qtr CPI number Australia had last week that's killed any chance of a rate cut, with the RBA now opening focused only upon rate hikes. 

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.. truth be told , I hadn't factored in that the market anticipated a Reverse Bank of NZ rates rise alongside a RBA rates cut ....

 

As much as some on this side of the Tasman rub their hands in glee that the Ozzie economy is struggling , unlike those Hickeysterical news headlines , the Australian economy is far far greater in depth and breadth than just resources and banks ...

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Gummy, slightly unusually I agree with everything you've said, and given Mr Wheeler doesn't seem a fool, I suspect Bernard is correct. Any rise in rates should need the NZD to drop and or other countries growth to be sufficiently confirmed for them to start raising rates at the same time.

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Reverse Bank

 

.

hehe

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I'm still thinking there needs to be more evidence that the US is on a genuine, non QE assisted, economic recovery and hence a strengthening USD before our RB can confidently push ahead with rate increases. If they get too carried away now, our interest rate differential is going to stick out like the preverbial. 

Australia is currently in the position our RB would prefer to be in, with respect to their currency, to allow them to move with confidence. We have the terms of trade and economic performance to perhaps warrant some tightening. It's the rest of globe that is still a sticking point in my view.

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You know the answer to that. We all do . Ofcourse it's not genuine . The system failed! they are trying to desperately kick start it with more funny money and hoping selective memory and denial will help along with trying to convince consumers "all is well" , no crash to see here, borrow borrow borrow.......

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I'm thinking that Bernard must actually read our opinionated & slightly inflammatory comments & allow them to influence his articles! Go us....

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Said it before. They introduced LVR's in desperation so they didn't have to move the OCR. Still banks can move their own targets regardless of the clowns at the RB.

The RBNZ are like a rottweiler with no teeth and no genitals!  Not sure there's a brain there either quite frankly

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I think if there was no brain, they would have raised by now. I'd bet Treasury is pushing for it....not a brain cell in that place.  Want to save money sack the entire place.

No teeth, well problem is they only have a sledgehammer, the OCR and that has a 2 year delay factor.  Im quite amazed they brought in the LVR actually but its effect sesm to be quite fast...

Interesting that Manufacturing gives us a far higher income per capita than farming yet Im worried that its left to fend for itself....and we'll raise the OCR...

regards

 

 

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Steven/Factboy - I'd love to see the text where Treasury have stated that they think the RBNZ is not doing their job i.e. that they should have hikes already. I've never seen that stated so can you please send me the link thanks, or is it just you guys guessing that's the case ?.

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I didnt say I thought Treasury was saying this....hardly public statement stuff.

Given Treasury's right wing stance?

regards

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Sorry Steven just retread your post, it was speculation not fact, fair enough

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maybe something is happening to HSBC or maybe it is just bad service as usual - in the UK at least

http://www.bbc.co.uk/news/business-25861717

Some HSBC customers have been prevented from withdrawing large amounts of cash because they could not provide evidence of why they wanted it, the BBC has learnt.

HSBC Bank Refuses To Let Customers Withdraw Large Sums

 

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I think that's due to tighter compliance rules and more focus on preventing fraud, than anything else.

Clumsily implemented, though, I agree.

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Unless of course we see deflation (which we will), then cash is king, and managed funds lose it all and go bankrupt...

regards

 

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You are not  a  saver but a saved.

Sorry you cant think...

regards

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Well you know dont mis-label yourself.  I am a saver I save part of my income from work. Are you one of these?  Suspect not, but in fact one of the retired and living off your "savings"?  The money you have accumulated while energy was cheap and plentiful. Now you expect the next generations to keep you in the comfort you think you deserve after your generation effectively used the planet up. 

Consider also all the free stuff you get like public tranport gold card, free healthcare, OAP pension etc and consider how that is paid for after higher interest rates send our economy into a recession and the Govn's income collapses. Consider the impact if you had to pay fr all of these "freebies"

Or that many other of the "saved" in countries outside of the western world get a pittance of interest.

Or that at a rate you consider fair. On that the borrower has to make that %, plus the bank marginplus a risk margin plus a profit % for themsleves in a flat economy with expensive energy.

So, "think" no....

be careful what you wish for, you could be a lot worse off.

regards

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Ah thats just it isnt it, yes lets ignore what you and your generation have done so well, avoid aknowledging that and then the moral obligation to do something about it.

regards

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That would require at least a decade I'm afraid Ivan, and by the time he woke up the world would have been long mined out and depleted, and everyone left for the stars. 

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OKay, picked yourself out a nice planet for yourself then? lots to go around Im sure.

Small problem of no  instantaneous FTL, but what the heck, if ppl can dream up economics models that have no bearing on reality why not FTL engines.

regards

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I think there are more people praying for lower interest rates, than higher ones.

.

Not sure how prayer works, though, is it a quantity thing? Or a 'more deserving' thing?

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Hard to know....that interest has to be paid for by somebody in a business.

I'd think low interest rates but what I see is mad speculation with that money on housing, by some.  Others just want to buy their own home and low interest rates allow that, hard to say the latter is un-deserving.  I certainly wont shed a tear for those speculators, though the aftermath of them imploding will cause misery on innocents, those I'll be sorry for.

regards

 

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