1 Comment 1 Commentby Sally Lindsay
“It’s something we don’t need. But the threat could be enough”, Jarrod Kerr, Kiwibank’s chief economist says.
The RBNZ yesterday lifted the OCR track to 5.59% by mid-2024. Kerr says the bank thinks there’s a 36% chance of another hike, and way out into 2024.
“We’re surprised by the move. The RBNZ’s forecasts were updated in offsetting ways. But the bank remains concerned about inflation. And fair enough, for now. But there’s a little more to it.”
He says there are two obvious reasons for the persistently higher OCR track.
“Firstly, the RBNZ wants the full force of recent tightening to hit households in coming months. Thoughts of rate cuts were deliberately squashed to keep wholesale rates, and therefore mortgage and other lending rates, high and dry. No pain, no gain.
“Early next year will be when we push for rate cuts.”
The second rational is the slight upward revision to the guesstimated ‘neutral’ or Goldilocks rate of too hot or cold, but just right, he says.
The non-contractionary rate was revised up to 2.25% from 2.1%. “That means the country can handle a little higher rates, and 5.5% is 0.15% less effective in constraining demand. So basically, monetary policy is not quite as tight.”
Kiwibank’s call for a rate cut as early as February looks increasingly unlikely, although Kerr says it needs to take the RBNZ at its word.
“The central bank is saying, clearly enough, the time required to see inflation fall back comfortably towards 2%, will take a lot longer than our forecasts.”
Kiwibank has reluctantly tweaked its view – however, still expecting the next move to be a rate cut long before most commentators including the RBNZ.
It estimates the first cut in May next year. “It’s more to do with direction, rather than precise timing.”
“If the economy develops in line with our forecasts, with weak economic activity and falling inflation, then we should start talking more about rate cuts as we head into next year.”
Kerr believes the RBNZ should start cutting interest rates early in 2024. “We are firm in our belief that rates should be marked lower in the first half of the year.”
One step backwards
The RBNZ is in attack mode, Kelly Eckhold, Westpac’s chief economist says.
He was surprised the entire OCR track was lifted out to 2026. “Over the past two Monetary Policy Statements, the RBNZ made two steps forward, by lowering the OCR trajectory in recognition of the cooling economy. Yesterday, it made a giant leap backwards.”
As a result, Westpac predicts a 40% chance of a further OCR hike, due to persistent domestic inflation, stronger house prices and short term growth balanced against foreign weakness.
Commodity prices have fallen significantly recently which is weighing on incomes and growth over the forecast horizon.
Eckhold says while the central bank’s forecasts for inflation are largely unchanged, it is because the RBNZ has revised up its longer-term OCR forecast.
House prices
The RBNZ’s monetary policy committee said house prices appear to have stabilised and its projection for prices to lift by about 3% next year is reasonably balanced.
While the RBNZ had previously expected house prices to continue falling through the back part of this year, prices have instead flattened in recent months. It says the predicted rise in prices will help support household spending.
The committee said higher interest rates have contributed to lower demand for housing, with house prices falling 15% from their peak in November 2021 to March 2023.
“Stronger net immigration, alongside a peak in interest rate expectations, has occurred at the same time as house prices have started to stabilise and are now assumed to have reached a trough earlier than expected.
Higher mortgage rates have, however, increased debt servicing costs for households, but the lagged impact of recent increases in mortgage rates has yet to impact household cash flow fully,” the committee said.
The yield on total mortgage lending is expected to increase by 1% over 12 months as borrowers roll onto higher interest rates.
The earlier-than-expected stabilisation in house prices is assumed to support household consumption over the next three years, offsetting the dampening impact of lower house prices.
Lower housing demand has also reduced building over the past year. Higher interest rates have made borrowing more expensive, and lower prices – particularly when construction costs are high – have made residential development less attractive.
The number of new residential building consents has fallen over recent quarters, indicating a substantial slowdown in residential building activity ahead, the committee says.
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As this article points out all of these predictions of a rate cut are long before other commentators in the market including the RBNZ itself. We had Mr Orr this week saying that the OCR could potentially remain at its current level until June 2025.
Presumably, economists are all looking at the same economic data when making these types of predictions, but I wonder sometimes whether some of you might as well be reading the tea leaves at the bottom of a cup. Kiwis have learned over the last 24 months to take economists’ predictions regarding the possible direction of interest rates with a very large grain of salt. The same goes for house prices.