It says inflation pressures will force RBNZ to do more
Westpac New Zealand is now expecting the Official Cash Rate (OCR) to peak at 3%, contrary to other forecasts which predict a peak closer to 2% - however, experts say that inflation pressures will continue to rise, and prices and rates will continue to lift in response.
Stats NZ released their labour market statistics for the September quarter this week, which showed a remarkable drop in unemployment, with figures sitting close to record lows. The unemployment rate is currently at 3.4%, down from 4% in the previous quarter.
Westpac acting chief economist Michael Gordon said that demand for labour is clearly strong, but while this may appear positive to individual businesses, it would create stronger inflation pressures over the next few months - something which has already been observed with a “sharp” spike in inflation in October.
“A few months back, we came to the conclusion that the greater risk for inflation now is hot demand - more so than the stories of cost pressures that we hear about frequently,” Gordon said.
“But even then, we’ve struggled to really keep pace with just how strong that demand has been.”
Read more: OCR increase can stabilise property prices - experts
“In these last few months we’ve had a whopper GDP number, and we’ve had a sharp rise in inflation, much of which has been driven by home-grown price pressures, and now we’ve had the labour market surveys for the September quarter,” he explained.
“The unemployment rate has dropped to 3.4% - that’s equalling the record low that we reached in 2007. That’s an extraordinary pace at a time when population growth has been quite muted.”
Gordon noted that the sharp drop in unemployment has likely been due to the long-term unemployed coming back into the work force. However, he said that if we reach a stage where demand significantly outstrips supply, inflation pressures will rise even higher - and so the pressure will be on the Reserve Bank to do more for stability.
Westpac is now predicting a ‘peak’ OCR of 3%, which Gordon said would have a strong impact on the movement of the housing market.
“The labour force participation rate has jumped back to its all-time high. That means people who have been out of the labour workforce for some time are being drawn back in to meet that demand for workers,” Gordon explained.
“For individual workers and businesses, strong demand won’t seem like a problem - in fact, it’s great.”
“But at a macro level, when demand outstrips our capacity to meet it, the net pressure gets channelled into prices, and that's a recipe for sustained inflation,” he said.
“We think the Reserve Bank is going to need to do more from here, and we’re now expecting the Cash Rate to reach a peak of 3% by the middle of 2023.
Read more: OCR decision puts an end to mortgage rate wars
“While other forecasters are talking about a peak of around 2%, financial markets are already taking something closer to our view, and that’s already reflected in the sharp rise in mortgage and interest rates that we've seen in recent weeks.
“That move hasn't been overdone, and if anything, we think it could go further from here. In the coming months, we should see that make a real difference to the momentum of the housing market.”
When it comes to mortgage and interest rates, ASB senior economist, wealth, Chris Tennent-Brown said that the time for low rates is well and truly over. He said the tried and tested strategy of fixing and rolling lower-cost shorter terms will be ‘undermined’ by sharp OCR increases, and borrowers should be budgeting for the prospect of higher rates.
“ASB is forecasting the RBNZ to lift the OCR back to its pre-pandemic level of 1% by early 2022,” Tennent-Brown said.
“We then expect more increases, taking the OCR to a peak of 2.0% by late 2022. This suggests that mortgage interest rates are likely to move higher over this year and next, but an OCR peak of 2% suggests mortgages should settle around historically low levels.”
“Fixing for some of the longer terms provides interest rate certainty for the next few years, but at a higher cost than the cheaper short-term rates,” he added.
“For those who want this longer-term interest rate certainty now, the cost of fixing for two to five years is still very low compared to the past twenty years.”
