The Reserve Bank (RBNZ) has raised the Official Cash Rate (OCR) by a whopper 50 basis points in a bid to prevent high inflation becoming embedded.
While Wednesday’s move marks the largest OCR hike the RBNZ has made in 22 years, ANZ chief economist Sharon Zollner notes financial markets are pricing in 80% odds of another 50-point hike at the RBNZ’s next review on May 25.
This would raise the OCR from 1.5% to 2% - a “neutral” level, which is deemed neither stimulatory nor contractionary.
Bets are on the RBNZ lifting the OCR in 25-point increments after May.
A ‘dovish hike’
Economists from the country’s main banks maintain the RBNZ’s strategy is to knuckle in now to avoid having to lift the OCR to too high a level in the future.
While the RBNZ wasn’t explicit on Wednesday about what it plans to do in May, it underlined its commitment to combatting high inflation and tightening conditions “at pace”.
Nonetheless, it tempered market expectations around where the OCR might land in the future.
Markets had been pricing in a “terminal” rate north of 4%, however the RBNZ clarified it remains “comfortable” with the OCR outlook it provided in its February Monetary Policy Statement. This only sees the OCR getting to 3.4% by 2024.
Zollner explained, “The market is likely to tame its view of what is needed beyond May. That’s because, encouragingly, the RBNZ has characterised today’s outsized hike as the bringing forward of tightening, buying them optionality in future.”
Indeed, there was a subdued market reaction to Wednesday’s “dovish hike” (in the words of BNZ’s head of research Stephen Toplis), which was already priced in. In fact, the wholesale interest rate curve fell following the announcement.
The pivotal two-year swap rate was down 13bps to 3.5%, and the 10-year fell 10bps to 3.66%, according to Kiwibank economists. The reaction in the NZ dollar was also muted.
How much hiking can we handle?
While there is consensus among bank economists around the RBNZ going hard now to avoid having to lift the OCR too high in the future, there are still question marks over how high interest rates can go while we grapple with a war and pandemic.
Zollner said, “Even though the OCR is still very low, the pace of change in mortgage rates has been rapid, and with the housing market cooling more quickly than the RBNZ anticipated, oversteering the lowdown is a genuine risk.
“On the other hand, not authoritatively moving against broad-based inflation pressures that are miles out of line with the target - and yet to show any signs of turning - would risk giving a further leg up to inflation expectations, making the job of reining in inflation that much harder…
“The uncertainty around where the OCR will (or should) peak could hardly be greater. But promptly getting the OCR closer to neutral - lifting the foot pretty quickly off the accelerator - is a prudent step at this stage.”
Toplis, who unlike Zollner believed the RBNZ would only hike by 25 points on Wednesday, can’t see the OCR going above 3%.
“While we understand why the RBNZ has done what it has done, we are somewhat confused as to how it can justify its actions on a “least regrets basis” when uncertainty is so high,” he said.
“In its very short statement, the Bank referred to “the highly uncertain global economic environment”, “an elevated level of uncertainty created by the persistent impacts of Covid-19”, and “heightened global economic uncertainty”.
“As we said in our previews, uncertainty does not seem consistent with aggression in a least regrets framework, as espoused by the Bank in an important policy framing speech last year.
“We have long refuted the idea that Governor Orr should be boxed as a dove or a hawk. In our opinion he is an activist.”
Effectiveness of rate hikes limited
Toplis also raised a key point, “The concern that dominates is: no matter what central banks do, do they have the right toolkit to deal with a massive negative supply shock?
“Arguably they didn’t do so well through the deflationary period associated with positive supply shocks. Will they fare any better on the flip side?”
73 Comments
Half A Percent Cash Rate Rise Drives Another Nail into New Zealand Property Falls
https://www.youtube.com/watch?v=QAvH25aCD1o
New Zealand Reserve Bank raises cash rate
Chief Cheerleader Zollner. I wonder what her agenda is, surely its not financial wellbeing of Joe Bloggs. If I were to guess, all she wants to know what the terminal rate is and how long we’ll stay there, so they can make maximum money off average mortgage holders.
And she’s wrong that neutral rate is 2%, no one knows what that figure is, most sensible people think in terms of real rates which depends on CPI at the time, so any economist worth their soul would not make such irresponsible statements without mentioning a word about what the inflation level would be, and since we don’t know what the cpi would be in future, we cannot know what the neutral rate will be. It depends, and she doesn’t know, in fact least of all given she’s employed by a commercial bank
With 7% cpi, ocr should be higher than where we are, possibly around 4%, so demand has a meaningful anchor. My point is, future is unknown, so why predict where the end point is. RBNZ should get on with 0.5% each meeting until inflation turns around and employment doesn’t shoot up. Let it go, and we’ll find where the neutral rate is. We have zero control on tradeable inflation or supply shocks, so just keep going up steadily until demand regains sanity
Tauranga still a long way off a 10% fall bud. -2.4% so far for 3 months. What you cannot count out is some sort of government intervention. You have to remember that next year is election year so Labour will pull out all the stops to prevent any form of significant housing crash. Next minute there will be some form of FHB grant or blatant cash handouts to buy back votes and prop up the market at the same time, you know another win, win from this government.
Hang about HouseMouse - you have one of the best perspectives on here and more valuable experience in property than most.
You can see through the BS from Tony A and The Church where others think they are talking impartially.
Don't let the crazies get to you
Besides, the parties just getting started... so there is going to be a hell of a lot to comment on in the coming few years... who knows what's going to happen but it's going to be one hell of a ride
HM, you are losing your temper yet again…"You are a pathetic excuse for a 'man'", just as I warned you yesterday, it's not good. You may not like what I say, but I don't call you names or abuse you personally
by Yvil | 13th Apr 22, 9:15pm
HM,
Again, you make some good, smart comments, but then you lose your temper too often and go off the rails. That's not good
by HouseMouse | 13th Apr 22, 8:16pm
piss off
by HouseMouse | 13th Apr 22, 8:35pm
Man your are dumb,
by HouseMouse | 13th Apr 22, 9:34pm
You are a pathetic excuse for a 'man'
The OCR only infuences the wholesale interest rates, not determines it. Other factors like the amount of borrowing required(from Overseas) and the risks perceived by those Overseas investors contribute more to the final interest rate level at present. The yield on the 10 Yr Australian Treasury Bonds is currently 2.99% and ANZ Australia will charge you 3.19% for a 1 year fixed rate (Less than 80% LVR), 2.99% floating and 3.54% for interest only. And that with an OCR from the RBA of only 0.1% as you mentioned.
Well everyone else looks like they are raising (maybe not Aus?), so overseas funding is already going up. Then there's the fact that NZ property has been in a massively accelerating bubble for about 10 years which puts defaults at a higher risk if rates go up, so risks are high.
The fact that its a lot cheaper to get loans in Aus may just see a lot more people leave here, accelerating the risks to the NZ property bubble.
"Toplis also raised a key point, “The concern that dominates is: no matter what central banks do, do they have the right toolkit to deal with a massive negative supply shock?"
In there in lies the problem, OCR hikes are going to do very little. It's going to be worse than the 80s with both high inflation and high interest rates.
Trillions printed world wide by banks over the last 24 months and at the same time the supply tap being turn off due to the panademic, poor government regulation and wars around the world.
The world is going to be a tough place to live in for the next little while, one for the history books that's for sure.
This is the key takeout…and nice to see the debate somewhat more informed after your post. Clients are freaking out on current interest rates… the working poor and driven hard workers in self employment are going to be wiped out by this cycle and I suspect it will not actually stop inflation.
I don't understand the assumption that, because the RB raised the OCR by 0.5% today, it will most likely do so again in May. It may for sure but 80% odds seems far too high today. I think the RB will re-evaluate the situation in 6 weeks time, with all the new data available then, both in NZ (inflation, GDP, housing etc…) and internationally, (oil and commodity prices), and then make a decision.
In my eyes, it's 50 - 50 chance of 0.25% or 0.50%
Not at all, right.
I guess the excuse is that 7% inflation is the past, while 2% OCR influences the future.
The only way it might be considered neutral is if the "expected" inflation is way lower than 7%.
Wishfull thinking imho in the best case, negligent compliancy most probably.
We'll see
Interesting times ahead
If we don't keep up with the US and their hikes, probably because our housing market is the first to fall, then our currency is going down, introducing new inflationary pressures.
For the RBNZ they have to fight inflation for their own credibility so will have to keep rates higher than the what the property market needs to stay buoyant, and they certainly won't be saving the market like in 2008 and 2020.
We may well get both, a lower currency and a lower property market, with further cost of living increases. So a pretty messed up situation.
But all very avoidable. All this Labour government needed to do was develop an inter-dimensional wormhole, take NZ to an alternate 2019 timeline where the global system doesnt get subjected to a fast spreading pandemic that totally borks the supply and production chains.
So simple people.
I can see that the OCR must rise, but in smaller steps. I do not think that it will do much to stop the inflation which is caused by many other factors. All this will do is to raise the cost of borrowing on mainly spend that is essential for existence, mortgage / rents, fuel bills, food bills, and of course bank loans, credit cards and the cost of government debt. The main winners will be the banks who will now get higher mortgage payments to boost their profits. I can see a lot of people grow in their own vegetables if they have a suitable garden or outside space.
naaa...
Many landlords are mrtgage free. they don't care of interest rates. The ones leveraged will need to fight this kind of competition.
Many tenants simply can't pay more (social problems will be so heavy that will require punitive intervention).
There is a "natural cap" in how much rents can be.
The reason it's a surprise is that inflation was supposed to happen after 2008 when central banks did a huge amount of money printing and you'll see the price of gold went up a lot with that expectation (before reversing). The national government was borrowing 200million per week for a long time. Since then there have been very loose monetary conditions that never led to inflation and there was more belief on modern monetary theory which downplays the risks of inflation because it can easily be controlled by withdrawing liquidity. If anything central banks were trying to create inflation without success which is why there was talk of us going to negative interest rates.
It seems we've finally found the amount of stimulus that leads creates inflation during these globalised times, and they've tipped it too far, for now.
I struggle to see a cash rate at 3.4% reining in inflation that is at 30 year highs and climbing. This is likely to be a multi-year struggle for many developed countries central banks.
This surge in inflation is not just because of a relatively small war on the other side of the planet or some temporary supply chain issues. Central banks have been building a pile of inlfationary gunpowder for the better part of a decade. Recent events have simply been the spark to ignite that gunpowder. Taking a piss on this fire isn't going to put it out, they are going to need a firehose.
It will take up to a year to see the full impact of rate rises spending and the housing market is. Most home loans are fixed in 12 and 24 month terms.
There is now a significant risk of overtightening as RBNZ has not kept inflation controlled, but a compounding error is not a foregone conclusion.
Both hard to read & hard to know what will happen from here. Good on Orr & co for yesterday's 50% increase. It's a start. The end of May is still a long time away & much can happen between now & then & probably will. Right now, I'm with the 80% chance of another 0.5%. That seems about right. But that's now & not then. Who knows? Not sure they do yet either.
What economist sees does not matter, what matter is Mr Orr whims and mood at that particular time.
Fed started and RBNZ followed it not realizing that USA is not only bigger economy but also diversified unlike NZ.
Now Mr Orr waiting for double digit inflation as he will comfort himself and his conscious that he has done everything that e could by raising 0.5%.
Question to be asked just on basis of economy fundamental, what the OCR should be if inflation is between 7% to 10% in developed country and we are not talking about country in Africa or Asia though even their economy fundamental should not change much.
OR the other way round, if OCR is at 1.5%, what the ideal inflation, should be.
No economist or expert or media will give you an honest answer.
It is very likely that the inflation will continue to incrase until real (rather than nominal) interest rates are sufficiently high (positive, in any case) and the labour market is substantially tighter than is it at the moment. Depending on what you think about expected inflation the real rates are currently around -3%. The border openings may help to take pressure off the labour market, and if we end up with a significant recession globally that’ll help RB also. Where do *you* think the OCR will top out at?
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