Cash rate now at its highest in seven years
The Reserve Bank of New Zealand’s decision on Wednesday to lift the official cash rate by 50 basis points to 3% is the right move, say three leading economists.
The OCR is now sitting at its highest level since September 2015.
With inflation high and unemployment low, economists from CoreLogic NZ, Kiwibank and Westpac say the case for the RBNZ’s decision was pretty clear.
CoreLogic NZ chief property economist Kelvin Davidson (pictured above left) said looking ahead, the Reserve Bank’s own projections envisaged a slightly “soggier” or sluggish GDP growth path than last time.
“A marginally ‘higher for longer’ projection for the inflation rate, a rise in unemployment driven by higher labour force participation, a slightly deeper peak-to-trough drop in house prices and a marginally higher peak for the official cash rate are all predicted by the RBNZ,” Davidson said. “In essence, not a huge amount changed in terms of their forecasts although the ‘hawkish’ language used suggests they’re still keenly focused on inflation and doing what it takes in terms of OCR increases to quell those price pressures.”
Davidson said the housing market would not be impacted too much by Wednesday’s decision.
“The upwards path for the OCR has already been ‘priced in’ to current mortgage rates, at least the shorter-term fixes,” he said. “With fewer property transactions taking place, there’s a lot of focus in the banking sector on existing borrowers and keeping market share.”
Davidson said this would also be playing a role in putting the brakes on mortgage rate increases and the outright cuts in borrowing costs that had been seen in recent weeks.
“The housing market faces plenty of challenges yet,” he said. “For example, there are parts of the market where recent buyers with a 20% deposit could have seen falls in property values erode most or all their equity – on paper at least. We estimate that nationally as many as 500 first home borrowers who bought near the peak of the market could now be in that negative equity situation.”
Davidson said even if mortgage rates were truly at a peak, they had already risen a lot which reduced the maximum loan size for new buyers.
“New investors may also be finding it harder to make the sums stack up in a world where rental yields are still low and financing costs are much higher,” he said. “All in all, the property market will continue to face a testing period for the rest of 2022 and into 2023.”
Kiwibank chief economist Jarrod Kerr (pictured above centre) said the RBNZ maintained a determined and resolute policy stance in its latest decision.
“Inflation needs to fall and by quite a bit,” Kerr said. “The central bank’s hawkish commentary highlighted the upside surprises in domestically generated inflation and the ensuing spike in wages. Although the RBNZ acknowledged the risks from offshore and the slashing of global growth forecasts, the focus domestically is purely one of destructing demand to break the back of the inflation beast.”
Kerr added that more rate rises were required for mandates to be met.
“We have another 100bps of tightening to come,” he said. “We forecasted a peak in this cycle of 3.5% and we believe the RBNZ is getting significant traction from its rate hikes to date.”
Westpac NZ acting chief economist Michael Gordon (pictured above right), meanwhile, said the bank recently upgraded its OCR forecast to a peak of 4% by the end of 2022 and Wednesday’s statement was consistent with this forecast.
“We remain of the view that tightening is unlikely to continue into next year,” Gordon said. “We differ from the RBNZ in that we see early signs that higher interest rates are having the desired impact in terms of cooling domestic demand. We expect that will become more evident to the RBNZ by the November review.”
Gordon said the RBNZ did not seem to buy into any signs of softening in the local economy as it highlighted capacity constraints as the biggest restraint on growth.
“The RBNZ repeated its comments that ‘it remains appropriate to continue to tighten monetary conditions at pace’ which leaves the door open for further 50bp hikes at the October and November reviews, which is still in line with our forecast,” he said.