Fixed mortgage rates may not follow forecast tightening, BNZ says
New Zealand’s major bank economists are divided over whether the Reserve Bank of New Zealand (RBNZ) will lift the official cash rate (OCR) on 28 October. The September quarter consumers price index (CPI), due on 22 October, is likely to settle the debate.
Markets are pricing in a 25-basis-point rise from the current 2.75%, with odds ranging from around 80% to more than 85%, according to research published by BNZ, Westpac, and ASB.
BNZ, ASB, and ANZ lean towards an October move. In BNZ’s latest Markets Outlook preview of the decision, head of research Stephen Toplis argued the outlook has shifted since the RBNZ’s cautious September statement, writing: “When the world changes you must change with it.” BNZ expects the OCR to peak at 3.75%. ASB’s latest Economic Weekly report forecasts two 25bp increases by year end.
In ANZ’s latest New Zealand Weekly Data Wrap, the bank said the weaker kiwi dollar and dearer oil since September had shifted the picture enough that this “keeps an October OCR hike firmly on the table”.
Westpac is the outlier. Westpac’s latest Weekly Economic Commentary expects the RBNZ to pause in October before hiking in December. Kiwibank expects one more increase this year but has not settled on timing.
Inflation forecasts point higher
Forecasts for annual inflation in the September quarter range from 3.7% (Westpac) to 4% (Kiwibank). That compares with 4.1% in the June quarter and the RBNZ’s own forecast of 3.9%. ANZ expects 3.8%, and BNZ and ASB both expect 3.9%.
Several banks argue the December quarter matters more. BNZ forecasts annual inflation of 4.7% by then and ASB 4.5%, with ASB pointing to fuel, airfares, and construction costs.
Kiwibank’s latest Our Take economics report warned that stretched household budgets may limit how far businesses can pass on rising costs. Its economists wrote: “It’s hard to hike prices when consumers simply walk away.”
Fixed rates already price in tightening
For borrowers, BNZ said much of the expected tightening is already built into wholesale rates. It expects the standard two-year fixed mortgage rate to rise well short of the 100bp of OCR increases it forecasts. Floating rates are the exception.
Westpac noted that fixed mortgage rates for two to five years now sit above 5%, but said “fixing for one of these longer periods still appears attractive” for borrowers seeking protection from further hikes.
Housing market stays soft
Westpac reported that September sales were down 12% on a year earlier, listings had hit an 11-year high, and prices were down 1.6% annually, with Auckland and Wellington weakest. ANZ said rising interest rates appear to be the main drag on buyer demand.
The decision lands 10 days before the 7 November general election, though BNZ argued that holding rates could itself be seen as political given recent inflation pressures.
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