The Reserve Bank has seen very little impact from higher interest rates so far, apart from lower house prices and a weakening construction pipeline, Deputy Governor and General Manager for Financial Stability Christian Hawkesby says.
Hawkesby, also a member of the Reserve Bank's Monetary Policy Committee, notes that 50% of banks' mortgage books are yet to roll over since the central bank started increasing the Official Cash Rate (OCR), meaning some borrowers will reset fixed mortgages at 6.5%, up from 2.5%.
"We are also often asked when we will know we have done enough monetary tightening, given the lags between an OCR decision and when it bites," Hawkesby noted in comments made to directors and senior officers of deposit takers and insurers in Auckland.
"The answer is that we still think we have more work to do. We’ve seen very little impact of higher interest rates so far, outside of falling house prices and a cooling of the construction pipeline," Hawkesby said.
"As inflation expectations have been rising, we also think that neutral interest rates have drifted higher, meaning that the OCR needs to be higher than otherwise before monetary policy is really restricting the demand side of the economy."
The Reserve Bank started increasing the OCR from 0.25% in October last year. It ends 2022 at 4.25% against the backdrop of the highest inflation for more than 30 years. Consumers Price Index inflation weighed in at 7.3% in the June quarter and 7.2% in the September quarter.
Hawkesby did, however, offer a caveat to the Reserve Bank's forecasting.
"The projections that we published in November had the Official Cash Rate peaking around 5.5% [in mid-2023]. However, 25 years as an economist has taught me that the only certainty is that our forecasts won’t be exactly right. There are always shocks and unexpected developments that will evolve the story."
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Hawkesby, also a member of the Reserve Bank's Monetary Policy Committee, notes that 50% of banks' mortgage books are yet to roll over since the central bank started increasing the Official Cash Rate (OCR), meaning some borrowers will reset fixed mortgages at 6.5%, up from 2.5%.
So what's the point of aggressively hiking the OCR further, don't they just need to sit back & wait...or do they want that 50% of mortgage holders to be smashed by the time they refix.
Yes thats how you fix inflation, you have to smash it.
Everyone thinks Inflation is someones else's problem to solve, you have to take money out of most pockets to solve it. They have told you what slow means, it means unemployment clicks up, wage demands drop and spending drops. I hear teachers want 8% wage increase, well expect 8% mortgages.
Not sure where they keep pulling these numbers from because it was widely reported that 60% of mortgages were rolling over in 2022 so how can 50% be rolling over in 2023 ? Most people would have gone at least 2 years or more this year so the numbers rolling over next year should be way lower than 50%. With the number of people going long and breaking and refixing this year I would expect like 20% rolling over in 2023.
The Inflation problem we have today hasn't just arrived. It's been decades in the making. At every event of financial instability, rather than keeping Risk where it should reside - in the price of Debt - Risk been transferred into Asset Prices. Negative Real Interest rates are at the heart of the problem, and correcting that is going to take time, courage and be economically painful.
One way or another, Nominal Interest Rates have to get above the Inflation Rate. We can do it quickly or drag the whole process out; arguably making it worse in the process. To the credit of the RBNZ they started earlier than most of their peers down the road to correction, and if they have erred at all it was in not going hard-and-fast at the start; jacking the OCR up to, say, 3.5% a year ago, stopping CPI prints hitting the 7's.
If they have learned anything, it's that what they did, hasn't worked out as planned. So expecting them to 'stand back', again, as they did a year ago, and wait for CPI to fall back, so Nominal rates 'catch up' with Inflation would be risking getting it wrong all over again. How will they look if CPI hits 15%, and they still haven't attempted to get out ahead of it?
That courage they need to correct the situation is in plain sight. It became most clear with the "The Recession we have to have" announcement. And now with this, 'we have more to do'. They know it. In fact, we all do.
So the sooner we get it out of the way, the better.
I think many more are locked out of the property market, then foolishly bought at the top with mommy and daddy's help, thus the best result is to smash house prices down for the benefit of the greater good.
At the lower end people cannot eat due to inflation and ridiculous rents (see point above)
Pressure: pushing down on me
Pressing down on you, no man ask for
Under pressure that burns a building down
Splits a family in two
Puts people on streets
That's OK
That's the terror of knowing
What this world is about (David Bowie ,Queen )
Not sure why anyone would think a recession is the best course forward.... Good Luck with that ... SLEDGEHAMMER....lol
Pick up my guitar and play
Just like yesterday
Then I'll get on my knees and pray
We don't get fooled again
Don't get fooled again
No, no
Yeah
Meet the new boss
Same as the old boss
So sit up and learn, if your not in a position to take advantage from the coming recession, make sure you damn well are for the next, only a fool thinks bankers are there to help every man in the street.
The most powerful lesson you can teach your kids is the economic cycle.
We're so f**ked
Shit out of luck
Hard-wired to self destruct
(Metallica)
Just bringing the quotes a bit more up to date... :)
Fallen on hard times and there's nowhere to hide
Now they've re-possessed the Rolls Royce and the mink.
Turning on the peace sign and it's back to the wood.
Soon there will be raised a holy stink.
Somebody wake me. I've been sleeping too long.
Oh, I don't have to take this lying down.
You can keep your promises. Shove 'em where they belong.
Don't ask me to the party, won't be around.
Looking for sunshine oh but it's black and it's cold
Yet, you say that milk and honey's just round the bend.
Giving us a hard time, my friends
handing us the same line again.
Fallen on hard times. We've fallen on hard times.
Fallen on hard times. If you read between the lines.
Fallen on hard times.
Jethro Tull / Ian Anderson
337 billion in total mortgage debt. So assume by 50% of the book they mean 168 billion is yet to be repriced at rates 4% or more higher than they were fixed at. That will extract an additional 6.7 billion a year from the New Zealand economy.
The majority of people will ignore the interest rate reset until it happens. They will then pretend it didn't happen for another month or so. Then they will freak the F out.
RBNZ quickly becoming an international laughing stock. Hiking rates to kill demand in the current environment will only reduce house prices. Most of our prices are not sensitive to reduced demand, and tourist spending is replacing falling domestic demand anyway. Madness
Maybe the reserve bank could just tell us how many mortgages there are. How many of those are fixed and when those fixed rate mortgages are rolling over month by month.
They obviously know all this information. Anyone who had that information could probably predict +/- 1 month when the 2023 recession will start.
These clowns have already gone too far. The residential housing industry has come to more or less a standstill since about September. As the current projects get completed, there is a HUGE hole awaiting in the industry in 6 - 9 months time. That is a lot of people that will only be cutting back on discretionary spending, but also not able to pay for the basics, as there will be huge job cuts in the industry.
Can they really not see that coming? I don't understand what the end game is here as currently seems like they are steering the ship into the rocks.
I agree, but what I am saying is the measures they have taken have already worked. Raising rates further is like drinking more beers when you are already 6 deep but havn't given it time to sink in. Next thing you know you are vomiting in the sink. They need to let the increases they have already made sink in thought the economy before raising further in my opinion.
What are your thoughts Brock? I'm interested to hear the other side of the argument.
Who says their hiking has worked though?
Their main goal for raising rates is inflation. The housing market is just collateral damage, no?
It literally says in the article, the only effect they've seen from hiking is a cooling housing market. They've seen very little change on their main goal of fighting inflation.
Yes - what I am saying is the effects of the cooling housing market are not being felt yet in the overall market. There is a huge amount of people who are still employed, still going to work every day, still getting paid, buying fuel, groceries, toys etc that in 6 - 9 months time wont have a job as a result of the increases that have already been put in place. There is a lag time between rates rising and the effects on the economy from the residential construction sector of around 12 months as this is how long it takes to get a project consented and built to CCC/Title.
In my mind it was too little too late, now it is way too much too quickly.
The end game is to kneecap price setting behaviour. If people are out of a job or fearful that they soon will be they'll be less likely to fight for wage increases. If businesses are suffering from low demand, starved of cashflow and on the verge of liquidation, they'll be far less likely to raise prices. Make no mistake, disinflation is a messy, cruel business with many casualties. This is why central bankers have made such a catastrophic error in fueling inflation over the past 2 years. We went through this before in the late 80s and it wasn't pretty.
Thank you for the insight. That does make sense. I guess I am thinking is the damage is already done they just need to give it time. Also, can we all collectively be furious they let it get this bad in the first place? The only winners over the past few years have been those who are already wealthy. Everyone one else has fallen behind, and now those who fell behind will be the first to be looking down the barrel of unemployment.
Inflation is around 7% normally OCR would be above inflation rate this has been out of kilter for some time, many people have taken advantage of emergency low rates which has pumped up house price’s and inflation. Why would banks continue to lend money with lower rates than inflation effectively losing money. Now and over coming years having established billions of dollars in mortgages this will be the time to drain the people dry. That million plus 3 bedroom box people purchased rather than paying interest of 30k it is now 65k per annum and climbing, many people will end up in huge financial difficulties with no way out as house price’s will continue to tumble.
Every tightening cycle always see the Reserve Bank tighten by more than it indicated it would at the beginning of said cycle. This is true of other central banks too. And so come the phrases: "we have more work to do", "inflation has proven stronger than we expected", "the economy has proven stronger than we projected", "the labour market remains unexpctedly robust" and all the other little gems that central bankers like to pull out of the hat!
When it becomes serious, you have to lie. - Jean-Claude Juncker
“When the music stops, in terms of liquidity, things will be complicated,” Prince said. “But as long as the music is playing, you’ve got to get up and dance.” Citigroup
Bernanke kept insisting that the housing market was stable even while it was falling apart, he had absolutely no idea the financial crisis was coming, he declared that Fannie Mae and Freddie Mac were in no danger of failing just before they failed,
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.
for more shits and giggles
https://www.businessinsider.com/bernanke-quotes-2010-12#nov-5-2010-24
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