Kiwibank warns of OCR hike risks

Economist explains why another increase is not necessary

Kiwibank warns of OCR hike risks

Kiwibank’s chief economist, Jarrod Kerr, has warned of the severe impact a possible OCR increase could have on New Zealand homeowners.

Kerr predicts a close call for the Reserve Bank (RBNZ) as it contemplates an OCR hike on Feb. 28. He  said a further rise was unnecessary and advocated for stability instead.

Debating the necessity of a hike

"The market had 100 basis points of rate cuts priced in this year... that's too extreme," Kerr said, reflecting on market expectations versus RBNZ’s stance and expressing his disagreement with potential tightening measures amidst current financial strains on households, OneRoof reported.

“The tightening they have done already has worked,” he said. “There’s a lot of financial stress out there so I think they’ve done more than enough to contain the economy. I mean, we’ve got very weak growth. Actually, we are contracting in part, so I think monetary policy is actually too tight.”

Highlighting the plight of homeowners grappling with soaring interest rates, Kerr pointed out the disproportionate burden on households already facing financial stress.

“Those are the ones with the debt, and they are being hit the hardest because of the rapid rise in interest rates,” he said.

“A lot of people are rolling off 2%, 3% mortgage rates onto 6%, 7% rates and that’s more than a doubling in your interest expense. That’s still coming through. I think about 90% of it has hit, but it’s still hurting, and according to the RBNZ the peak pain they are inflicting is coming through this year.”

RBNZ’s delicate balance

As the RBNZ weighs its options, Kerr anticipates a firm stance against rate cuts, possibly coupled with a modest increase to manage market expectations and mitigate inflation pressures.

“Their bias is clearly towards trying to keep interest rates higher, so I think if they don’t go, they will deliver a very hawkish commentary along the lines of ‘stop thinking about rate cuts, we are not there.’ It will be a very firm message,” he said.

If RBNZ does proceed with a hike, it’s expected to be 25 basis points initially, followed by an additional 25 in the future, with banks likely to pass this increase onto mortgage rates, OneRoof reported.

“That would go against what the market has been pricing in and the movement in mortgage rates recently,” Kerr said. “Mortgage rates have come down a little bit, not a lot, but banks are still wary the RBNZ hasn’t signalled they have finished hiking yet.”

A 25-basis point increase would significantly stress already struggling households.

“Anyone who is rolling off from now would face an even higher rate,” Kerr said. “A lot of households have fixed for six months to one year in the expectation that interest rates will fall and if that’s not delivered then it’s just more pain for longer, and I think it’s unnecessary.”

Battle against inflation

Kerr noted that inflation remains a challenge globally, including in New Zealand. While the US saw inflation decrease from 9.1% to 3%, maintaining that level has been the challenge for the past six months. Dropping from 3 to 2% is particularly tough for central banks, he said.

Similarly, New Zealand’s inflation rate dropped from 7.3% to 4.7%, with expectations it will approach 3% this year. However, reducing it further to 2% mirrors the difficulties faced internationally.

Kerr acknowledged the necessity for central banks to maintain higher rates for an extended period but firmly believes New Zealand does not require additional rate hikes.

Kerr said the economy isn't “screwed,” with businesses, though grappling with the market conditions, are managing to adapt, OneRoof reported.

To access the full OneRoof report, click here.

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