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Economists at the four biggest banks now all see the Reserve Bank starting to hike interest rates in November

Economists at the four biggest banks now all see the Reserve Bank starting to hike interest rates in November

Westpac economists are now picking the Reserve Bank (RBNZ) will raise interest rates three times by May of next year.

And economists at the country's largest bank, ANZ, now see the Official Cash Rate hitting 1.75% by February of 2023.

Westpac and ANZ both changed their calls on Wednesday and are now picking the first OCR move will be in November of this year. They have joined the economists at ASB and BNZ, both of which changed to a November call on Tuesday of this week.

The final catalyst for the moves by the economists, following on from a string of positive economic data, was the release on Tuesday of the latest NZIER Quarterly Survey of Business Opinion. The survey portrayed an economy rapidly overheating, with labour shortages the worst they've been in a survey that dates back to 1976.

The RBNZ makes its next public statement on interest rates at its Monetary Policy Review on Wednesday, July 14.

If the Westpac economists are correct with their latest call of three hikes - in November, February and May - this would take the Official Cash Rate from its current 0.25% to 1% by May 2022.

ANZ chief economist Sharon Zollner is forecasting the RBNZ will lift the OCR "in steady steps" from November to reach 1.75% by February 2023. She notes that the financial market is already "pricing in" almost 90% odds of a hike by November, and “one and a half’ hikes by February.

Westpac acting chief economist Michael Gordon admitted to being "caught on the hop".

"Having just recently brought forward our forecast of the first OCR hike to August 2022, we’re now questioning whether the RBNZ has even that much time on its side.

"We now expect the first OCR hike to occur in November this year, with follow-ups in February and May next year, and a further gradual tightening over the following years," he says.

Gordon says it has been apparent for some time that Covid-19 has largely manifested as a supply-side shock in New Zealand’s case, with disruptions to supply chains, soaring shipping costs, and a loss of access to overseas workers.

"The key question for us has been whether the demand conditions were in place for that initial price spike to translate into an ongoing series of price increases.

"In that respect, yesterday’s Quarterly Survey of Business Opinion was a big deal for us. There was evidence of strong demand throughout the survey – measures of activity, hiring and investment were all up substantially compared to three months ago, and profitability was seen as improving even in the face of mounting cost pressures. That strength wasn’t universal – the building industry is clearly running red-hot, while retailers are still struggling to improve their profitability – but it was widespread enough for us to take notice."

Gordon says putting this all together leaves a picture of an economy that is already running close to its potential, even with the ongoing closure of the border.

"And with firm demand and mounting supply pressures, inflation is set to rise much higher than the RBNZ expected over the coming quarters."

There is still a good case to be made, Gordon says, that some of the current inflation pressures will be temporary, or at least non-repeating.

"As the global economy reopens, we’d expect that supply chain disruptions will be ironed out, demand for physical goods relative to services will normalise, shipping costs will come off their peak, and employers that are bidding up now to deal with their current labour shortages will look for ways to claw back those higher pay rates. That could set the scene for a period of stubbornly low wage and price growth a few years down the track.

"But the issue is whether the RBNZ can hold out for that long. With demand running hot, there’s a greater risk that recent price hikes feed into people’s expectations of inflation, and once that becomes embedded it’s hard to dislodge again.

"We expect that when OCR hikes begin, the pace will be gradual – at three-month intervals initially, then stretching out to six-month intervals. As others have noted, households have taken on significantly more debt since the last time that interest rates rose, so a little could go a long way in terms of squeezing household budgets and dampening demand."

ANZ's Zollner, meanwhile is now even suggesting a start to hikes in August - just next month - could come into play as a possibility.

"Following the Monetary Policy Review [on July 14], CPI data next Friday [July 16] and the labour market report on 4 August are pressure points that could well see the market, and quite possibly the economists, bring August into play," she said.

"The RBNZ will probably want to choose words for the Review that leave their options open about the exact timing of lift off, as they will no doubt be looking forward to those data reads with as much anticipation as we are. Game on."

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55 Comments

I wish they would leave those interest rates alone.. as an employee and a mortgaged property owner I love inflation, my salary will go up in the next salary review and my mortgage is decreasing in real money terms.. what's wrong with that?

Inflation means money is losing its value, those with money invested or who are receiving a fixed income become poorer.

plus- those salary increases will only be possible if your company can pass the additional costs through to customers - when they can no longer do this - then the business either goes broke (and you have $0 salary with a mortgage) or they start laying off staff (which again could mean $0 salary with a mortgage)

Inflation is tax. Why wish for that?

Money supply growth is a tax.... and a huge wealth transfer mechanism. ( In my view one of the primary causes of the growth to extreme wealth inequality )
From $85 billion back in the mid 1980s' to over $500 billion today ( depending on how one measures it )
All done in the name of "economic growth" within a Neo-liberalism paradigm.

I reckon the biggest con-job done in Modern economics/Central Bank policy was to get everyone to believe that inflation was the CPI.
The effects of Monetary inflation can manifest in different ways, as new money is created and enters an economy. Consumer prices is just one way.
Asset prices is another....and its only in the last few yrs that asset price inflation might be considered, somewhat, a "Monetary Policy" issue..
Before the GFC Central Banks were pretty much blind to levels of Money supply growth...as long as the CPI was low. ( In the mid 2000s' NZ had double digit Money supply growth )

I've been reading books written back in the 1950s to 1970s.... Most of those books, when discussing inflation , talked about Monetary inflation and how that impacted consumer prices, amongst other things....

End result is what we have today..... An extreme division of wealth... and extreme Asset prices..

The scary thing is that some people think the current interest rates are normal.
In any case the banks say they have stress tested loans to 6.5%.

exactly even a 1.75% OCR isnt going to make people lose their homes, but it will cut the discretionary spend which is exactly what you want when the economy is overheating

How about the money supply increase created by the commercial banks when they lend - average $20 billion every year, but $32 billion last year - created out of thin air. Nobody bleats about that, only when the central bank does it.

Read Friedmans monetary history of the United States. Its excellent

Rate will drop even further when a real recession hits. The economy has been “distracted” by covid.

You are correct economic actively has almost peaked running on vast global Govt stimulus the bond market in the US is starting to sniff out the coming downturn with rates now dropping https://ycharts.com/indicators/10_year_treasury_rate

'If they are correct, this would take the Official Cash Rate from its current 0.25% to 1% by May 2022."

Am not an economist nor an expert but can say that it will not happen as the moment they try to raise markets will react and they will shit in their pants as no one can afford to stop the party.

They may increase rate but not before next year and that too will be a slow process to reach 1% unless economy forces them otherwise all this talking is time pass.

There was talk yesterday about the Trainspotting bed scene, where indeed the bed is pooped in.

To be fair the OCR has only been at this "emergency" level for under 18 months, reverting it back to 1% wont have a huge impact over the whole debt market, just those that leveraged to the hilt over the last year or so of the lollie scramble

RBA announced yesterday that their OCR will not be touch until 2024, this will over-shadow what RBNZ and their OCR movement.

2024 is optimistic, it may stretch out towards a decade.

US government bonds rallied on Tuesday, pushing the 10-year yield to the lowest level in four months, as investors unwound bets for tighter monetary policy and reacted to a disappointing survey on the services sector.

NZ bank economists, pants on fire.

Exactly right the RBA is what matters as they dictate what the RBNZ can actually do with rates

thats not what the RBA said at all. The RBA stated they would not extend yield curve controls beyond April 2024 and bond purchases would be reduced immediately, with further reductions to be advised by Nov. The bank then gave a number of interest rate scenarios including the possibility that rates would begin to rise in 2023 however they would not rule out a rate rise as early as 2022 if the current supply problems led to an uptick in prices.

The RBA then gave further guidance that they were no longer looking at wage increases as a measure for raising rates (as had previously been advised) but instead would be watching the CPI figures and rates would rise if the CPI moved out of the 1-3% band.

thats not what the RBA said at all. The RBA stated they would not extend yield curve controls beyond April 2024 and bond purchases would be reduced immediately, with further reductions to be advised by Nov. The bank then gave a number of interest rate scenarios including the possibility that rates would begin to rise in 2023 however they would not rule out a rate rise as early as 2022 if the current supply problems led to an uptick in prices.

The RBA then gave further guidance that they were no longer looking at wage increases as a measure for raising rates (as had previously been advised) but instead would be watching the CPI figures and rates would rise if the CPI moved out of the 1-3% band.

These so-called "economists" are just making things up as they go. One minute house prices are going to collapse and the next minute OCR is going to increase at a rapid rate.

Let's face it, we are in unprecedented times with little to no comparable data to work with. Take everything with a grain of salt.

So flyer, so who are you going to listen to, or are you just going to bury your head in the sand then?

Remember these bank economists are in the game and will be currently determining long term term deposit and mortgage rates which you could be looking to locking into right now. There is never any certainty, but I would take their opinion fairly seriously and factor it in if I had a cash or a mortgage . . . to simply dismiss them to me seems a little arrogant or foolish or both.

They're just salesmen at the end of the day. The product they sell is debt and they want you to have a "healthy" amount of it. That's why they never make any promises or guarantees - because they can't and/or won't

ydb
Make sure that your prejudices don't end up costing you . . . it seems that this could be the case.

Hasn't cost me and it won't in future as the "prejudices" have been proven time and time again. Let me guess - you take your bank manager's word as gospel?

ydb
Read my 2.35 post.

Already did. My advice - do your own research and be wary of professionals in the game.

Yes. 'Independent experts' are rarely independent and rarely expert.

I'll be listening to myself thanks.

Rates are so low even a 1% increase is nothing.

flyer
Even a 1% increase on $700,000 is $7,000 after tax income . . . about $270 a fortnight out of the pay packet. Would truly wipe out any annual salary increase or increment.
Glad for you that is nothing.

flyer an i would cry for you

Only a real problem if you are leveraged to the edge. Then its time to spud the bed (trainspotting reference)

but it wont just be 1% if the base rate goes 1% - the 2 yr rate will be more like 1.7 or even 2% as further rises will be factored in -- i took 2.99% for 5 years at the end of Feb -- you are looking at 3.75% today and i would guess it will be over 4% by the end of the month - despite no base rate rises -- and last i heard about 80% of loans were on short term fixes under a year -- the pain will hit quickly as we are now talking many mortgages in excess of 600K -- where 1% really matters

kpnuts
You aren't stupid. 2.99% is a good prudent five year rate.
Cheers :)

thanks printer -- i kicked myself for ages missing a couple of good rates in teh last few years -- was nice to get one right for a change :) although TBH i just didnt see how the 5 yerar rates could go lower

I took 4 years at 3.09%. Fixing longer is starting to sound like a "sound" financial decision.

Steady on team, with a new build ANZ and ASB are offering 1.69-1.79%. Go interest free. Easy cheap money for years to come for an investor.

My understanding is thats a 1 year fixed rate.

Easy cheap money for year to come.

Worse. It's a floating rate isn't it???

I expect the OCR to be negative within 3 years and mortgage rates to be circa 1.5%

HouseMouse
What is your basis for that assertion or just wishful thinking/guessing?
RBNZ has already signaled increases.

Think about it Printer8.
I am sure you will agree markets go in cycles.
Typically there has been a global financial crisis once every 8-10 years over the past 30 years.
Economies are getting more volatile and more interconnected.
I didn't say the OCR would be negative in one year. I said within 3 years. That's the timeframe within which I think there will be a financial crisis, and the OCR will be cut from circa 1.25-1.50% back to a negative rate.
We haven't had a global financial crisis since 2008.

if there is one, lots of people will go bankrupt. We might be in a recession for a long time.

I'm with you house mouse. Ever cheaper money is the trend for the last 20 years. It will continue till our currency's inflationary death spiral.

*Shrug* anyone's guess where rates will head. I'd rather fix long (equivalent of nearly 50% of my current loan term) for certainty of payments than risk coming up for refinance with an increase.

... and employers that are bidding up now to deal with their current labour shortages will look for ways to claw back those higher pay rates.

Care to elaborate Westpac?

its called price increases for the customer

That would be inflation generating. He’s talking about inflation subsiding.

That could set the scene for a period of stubbornly low wage and price growth a few years down the track.

Why say “claw back higher pay rates” and not “pass on those costs to consumers”?

They're still shoveling debt out the door like interest rates will never rise

I am wondering how many people actually read NZIER Quarterly Survey of Business Opinion before they argue in comments section.

It's as bad as Reddit.

Not quite, not yet, but the similarities are rising.

If you run a business - no need to read it - you already know the realities of increased costs - rates /rents / insurances/materials/ wage pressures and skilled staff shortages, supplu chani issues - increased regulation ... and so on --

All my cost increases are in freight and raw material. And time delays. Rent - the landlord came through and isnt putting the lease cost up, he cant review for another 2 years. Slight increases in outgoings, have all the skilled staff I need !

Hahaha scare tactics to lock in rates now. Same shit different decade

I am sticking with the first rate rise next Feb. followed by 5/6 more, taking the OCR to 1.75/2.00% by mid to late 2023. CPI inflation will exceed the RB's upper level of 3% during this period.
However, the inflationary pressures from supply chain disruption will gradually fade and wage pressure will not be sustained. We cannot suddenly be a high wage economy without much higher productivity. So, I see the OCR around the 2% level for some time.