BNZ economists say the Reserve Bank should be hiking interest rates this week - and by 50 basis points, judging by how strongly the economy is growing.
And the BNZ has brought forward again the timing of when it expects the RBNZ actually will make its first upward move.
Head of research for BNZ Stephen Toplis conceded in the bank's weekly "Market Outlook" that the chances of the RBNZ moving rates when it makes its next official call on Thursday were "nigh on zero". The universal market view is that there will be no change to the Official Cash Rate, which has now been sat on 2.5% since March 2011.
Toplis concluded that the central bank would not raise rates this week "because that’s what they’ve been telling us for some time now".
But he said it did not make sense that the OCR was currently at record lows and real mortgage interest rates were both negative and falling.
"In our opinion, the Reserve Bank should be hiking its cash rate this week, and probably by 50 basis points, in order to ensure that domestic demand does not get out of control," Toplis said.
- building sector activity is rising aggressively;
- the agriculture sector is faring well on the back of rising commodity prices and a bounce-back in production post-drought;
- commodity price gains have been reflected in a terms of trade which has risen to its highest level since 1973;
- retail sales growth is robust;
- employment intentions are very strong;
- services are performing well;
- tourism numbers are rising steadily driven by growth from China;
- net migration inflows are adding significantly to population growth and, in turn, domestic demand.
Toplis said there was very little doubt GDP growth would accelerate to an "above trend" level in the very near future.
"We have annual growth peaking at 4% in [the second quarter of] next year but the balance of risk is that it will push even higher."
Above trend growth meant that any spare capacity in the economy would be absorbed.
Unemployment to drop quickly
This would be highlighted by the unemployment rate dropping quickly to around 5%.
"Such absorption will result in non-tradables inflation pushing higher. Conceivably, this will be occurring at a time when the disinflationary pulse from an appreciating currency begins to dissipate resulting in heightened tradables inflation as well. Put the two together and annual CPI inflation will start testing the top end of the Reserve Bank’s target band by early 2015," Toplis said.
He said that BNZ economists would be following this week's statement from the RBNZ "with more fascination than usual".
"...We are dying to see how the Reserve Bank reconciles the aforementioned issues with its past-stated intent to hold off tightening until around June next year.
"If the Reserve Bank was entirely consistent with its previous commentary it would have to confirm that the tightening cycle will not commence until June at the earliest. This conclusion originates from the September Monetary Policy Statement."
'The most disconcerting thing'
Toplis said that perhaps the most disconcerting thing for the RBNZ was that mortgage interest rates for sub-80% LVR borrowers were falling.
"It will be particularly worrisome for the [central] bank that floating rates, which the majority of borrowers face, are in decline because this means that not only are marginal rates falling but so too rates on the existing stock of lending. On balance, this means that monetary conditions are easing aggressively for many.
"If the Reserve Bank is to surprise with an earlier tightening, this will be the catalyst.
"Be that as it may, from a purely consistency perspective, it will require some very good story telling if the RBNZ is to formally suggest an early-year tightening. Indeed, the story telling would have to be excellent to bring the tightening forward from June!"
Toplis said that with this in mind, it seemed highly unlikely the RBNZ would point to, or follow through with, a January rate hike.
"We thus think current market pricing for a 35% chance of an increase is overdone."
28 Comments
It's happening. Companies are starting to pay a lot of money to get skilled people on board or simply to retain the ones they've got. Go and talk to anyone running an Engineering / other development related consultancy and they'll tell you the same thing.
PS - Steven I agree re Wellington. Nothing going on there! There is a lot of earthquake strengthening work to do and Transmission Gully so it won't die but Auckland and Chch are where the action is.
So its probably sector specific then. I used to work in an engineering consultancy actually, but it was some years back. I know a distant cousin rolled over to OZ the beginning of the year due to lack of consultancy level work.
I'd quite like to see the projects you seem tot hink will flow through to a wide spread pay increase?
Even if its the sector you suggest its long over-due, and that has to flow on to many others.
regards
Yes sector specific at the moment but the building sector generally leads the rest of the economy (for better or worse!).
You will always get people going to Aussie regardless of what is happening here. More interesting is the number of Australians considering coming to NZ for work. This is a very big change.
With all due respect I think maybe being in Wellington has dampened your outlook. Auckland and Christchurch are humming.
Yes Aussies come here, usually younger ones who want faster promotions and are prepared to jump the ditch for a while from the ones Ive met.
Its hardly surprising that chch is humming I have mates moved down there and they have a choice of work, but as someone else said take chch out and the building is down.
regards
You are not making sense.
Of course NZ as an economy lives in that world. So locally chch has a boost due to the massive rebuilding, but building in the rest of the country is down 2~3%.
So what is tehre to embrace exactly? some suppliers, builders and subbies making $s in one city? Maybe some making a bit in Auckland?
Hardly an awe inspiring recovery leading to significant inflation.
regards
"You are not making sense."
I've been accused of worse. If 5 people were available to go for a job in Wellington previously but now only 2 people are available to go for that job (because the other 3 are working in Christchurch) it feels like there are a lot more job opportunities in Wellington.
Nearly every major company involved in the construction sector outside of Christchurch is involved in doing work for Christchurch. Jobs are being created outside of Christchurch because of the Christchruch work.
Every time someone leaves their job in Wellington or elsewhere to go to Christchurch a job opens up in Wellington or elsewhere.
I appreciate it's quiet in the regions but Auckland and Christchurch are very busyand they make up half the country. We haven't even started the building in Auckland. The next few years will see massive building programs.
steven it's not all roses out there but things are looking pretty damn good for NZ. Can I suggest you get out more and talk to people involved in construction / development. It's exciting times!
Interesting Article. Economists from the Local Retail banks (especially ANZ/BNZ) are expecting RBNZ to raise OCR the coming january or even this december. However the Economists from UK/US seem to be pessimistic that NZ is going to rise OCR so far at this point, due to its high Interest rate in relation to AUD.
Rates will not rise in 2014. [interest rates that is!! Local body ... hikes all the way].
RBNZ & Banks would like rates to rise.
But actually retail rates are dropping.
Client called a finance co & asked for a settlement figure (early) - was imm offered a rate cut of 50%. They want to sell you $$$$, they dont want keep it, so they are having to discount the price.
But he said it did not make sense that the OCR was currently at record lows and real mortgage interest rates were both negative and falling.
Can I lodge a please explain?
Interpolating last Friday's closing yields for NZ 15's and 17's government notes and substracting the 2016 linker yield throws up a ~1.4633% break-even inflation outcome, looking ahead to Feb 2016.
Of course BNZ would stand to gain from a rate hike wouldn't they ?
Especially when they have had 5 long years to sort their funding out .
Their WACC ( Weighted Average Cost of Capital ) is probably lower then the OCR , so any increase from a rate hike is sheer profit and dividends straight to the Aussie parent
That would be incredibly, shallow of them. Not so sure on the profit due to there being another 3, unless they were an effective cartel, which is possible....
At some stage the CEO should be asking, "why do I employ someone whos been wrong for 5 years, and publically so".
What makes me ponder is the over-riding belief that NZ is immune to external forces. So yes we might see a recovery, but really where do we well to when the rest of the world is trying to do the same but is poked and has a far lower exchange rate.
regards
Well im currently doing a new dining room and kitchen, so Im in PM, Bunnings and M10. Sunday they had 2 staff on the floor which now seems the norm, last year 4+ was more normal. I used to have to queue to get in PM, now Im usually 1 of 2 or 3 cars. Even Bunnings seems quiet, just got $50 off a new AEG drill....batteries are now < 1/2 the price they were ($120 v $249).....New 90deg head drill, old 12v one $480, new 18v one $450, no deflation huh....yeah right.
Now in chch yes there is plenty of work so rising wages and prices doesnt surprise me....not here in Wgtn though from what I can see.
regards
Your in the wrong city, my local Bunnings has around 200 - 300 cars in the car park and they're building another 10 minutes down the road.
The fact that you're living in Wellington goes a long way to explain your eternal pessimism and your left leaning tendencies.
It would be interesting to see the demographics, but it seems to me that more and more are hanging in after 65. The public service is full of ageing workers...why leave when you and your partner are dragging in 4 incomes, some as much as 6 when they have private super also?
Workers with kids = working for families - so wage increases are a waste of time (abatted by 60% +).
No need to give them a pay rise.
Older workers are largely content, mimimal mortgage, kids gone, their wage increase is National Super.
So they don't need a wage rise either.
So the above become the preferred employee....leaving the rest to fight it out.
Im not sure what you are saying here but, the few OAPs I know with no other money than the super are pretty much penniless.
Public service, well I'll assume they are productive, plus frankly get above 50 and most private companies wont touch you, hence you drift to working in teh public arena for less money as well.
I did see a simple visual on the stats...here you go,
http://www.stats.govt.nz/Census/2013-census/profile-and-summary-reports…
more detail,
http://www.stats.govt.nz/Census/2013-census/profile-and-summary-reports…
regards
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