Economists discuss outlook ahead of RBNZ meeting
Despite stronger than expected economic performance, major bank economists aren’t expecting the official cash rate to rise in October.
ANZ and ASB are of the view that the Reserve Bank of New Zealand will keep the official cash rate on hold at its next Monetary Policy Review on Wednesday, October 4, but both expect pressure to stay on the RBNZ to ensure inflation moves down.
ANZ senior economist Miles Workman (pictured above left) told NZ Adviser that while the bank had forecast no change to the official cash rate in October, the bank expected the official cash rate to rise at least once more in the current cycle.
Workman said domestic inflation pressures, renewed momentum in the housing market and a stronger-than-expected GDP result (0.9% growth over the June quarter), formed the basis of expectations of a further rate hike ahead.
ANZ is forecasting a peak cash rate of 5.75%, and although not reflected in its current forecast, Workman said that the bank was not ruling out a further hike should the Reserve Bank find it necessary to return to the hiking table.
“Our forecast is for the official cash rate to remain on hold next week [in October] but we do have a 25-basis point hike pencilled in for November,” Workman said.
In addition to domestic inflation pressures, which are considered to be more “sticky”, and renewed housing momentum over recent months, the household sector remains robust, he said.
In discussing the bank’s forecast for a further rate hike, Workman compared the current economic situation to the period leading up to the 2008 Global Financial Crisis (GFC). In early 2007, the RBNZ took the official cash rate from 7.25% to 7.75%, before returning to the hiking table again in June and July, taking it to a peak of 8.25%.
“Looking at the domestic economy, there’s certainly a bit more momentum under the hood than we or the Reserve Bank previously anticipated,” he said.
Globally, Workman said that the slowdown in China had a material impact on New Zealand exporters, prompting falls in many export prices, but noted that more recently, there had been “tentative signs” of a stabilisation.
“We’re going to remain in that scenario for a little while yet where we’re still quite worried about what could happen globally, but ultimately, the Reserve Bank needs to set monetary conditions for domestic economic conditions,” Workman said.
“Those conditions do look a touch stronger than previously thought.”
ASB wealth senior economist Chris Tennent-Brown (pictured above right) confirmed that the bank was also forecasting a rate pause in October.
While ASB was not forecasting a further hike this year, Tennent-Brown acknowledged there were risks that inflationary pressures could escalate and said that rate cuts were likely to be “a long way off”.
“We think that the Reserve Bank has gone earlier and gone more than [other central banks such as Australia and Canada] so hopefully this is it,” Tennent-Brown said.
Fixed mortgage rates under pressure
Workman noted that renewed expectations around the need for central banks to hold policy rates at higher levels for longer had flowed through to wholesale markets and impacted some of the domestic swap rates, influencing mortgage rates.
Tennent-Brown acknowledged that banks had moved their rates at various times, noting that over the recent period of official cash rate hikes, banks had cut their longer-term fixed rates.
With the official cash rate now on hold, various fixed rates had started to increase, Kiwibank and BNZ having announced increases to their fixed mortgage rates in September.
“Underlying wholesale rates and term deposit rates have been under upward pressure and that’s where the risk lies on mortgages,” Tennent-Brown said.
In 2022, five-year fixed mortgage rates sat around 6.99%, while now short-term mortgages are under pressure from the rate hikes this year, he said.
Tennent-Brown said that ASB advised borrowers to budget for higher mortgage rates in its reports and noted that the full effects of existing monetary policy tightening were still to come through as borrowers roll off lower fixed rates onto higher rates.
“That feeds into our view that the Reserve Bank has done enough at this stage, but it doesn’t mean people should expect rates to stay the same,” Tennent-Brown said.
Markets are currently pricing in a high probability that the Reserve Bank will need to hike one more time, he said, noting that the effects of a rise would flow through to both variable and fixed rates.
“We see these rates in the high 6’s to 7’s for fixed terms and close to 9% for the variable rates…we hope that this is the range they stay in,” he said.
Workman said that ANZ was of the view that the RBNZ Bank would need to return to hiking, and that although the bank officially forecast an official cash rate peak of 5.75%, if a November hike were to occur, it would likely be followed up by a further 0.25% hike, taking the official cash rate to 6%.
The OCR, currently 5.50%, has increased 12 times since October 2021, and has remained at the existing level since May. In a summary of the Monetary Policy Review in August, RBNZ chief economist Paul Conway said that while inflation (and inflation expectations) had started to fall, they were still “far too high”.
The official cash rate would need to stay at restrictive levels “for the foreseeable future” to get inflation back in its box, Conway said.
The RBNZ will announce its decision on the official cash rate on Wednesday, October 4.
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