ANZ chief economist explains her forecast
After 12 official cash rate hikes, borrowers could at last get some reprieve from rising interest rates, as the Reserve Bank of New Zealand has indicated no further rate increases ahead.
But there is a risk of further monetary policy tightening this year, a leading economist says.
The RBNZ hiked the official cash rate by 0.25% in May, taking it to 5.50%. The central bank noted in its May monetary policy snapshot that inflation (6.7% for the March 2022 quarter) had dropped since the December 2022 quarter, but said that it remained “too high”. Inflation expectations remained elevated, while most measures of persistent (core) inflation had remained “near recent peaks”, the Monetary Policy Committee said.
The Reserve Bank’s OCR forecast showed that the rate would remain at the current level this year, with the first rate cut to occur in the second half of 2024 (September quarter).
ANZ chief economist Sharon Zollner (pictured above) told NZ Adviser that the bank had a further interest rate hike pencilled into its forecast.
Its view is that the RBNZ will need to respond to a stickier inflation impulse that what is currently foreseen.
“We see the risk as tilting towards them needing to do more … we’ve got another hike pencilled in for November,” Zollner said.
She noted that the bank had originally predicted a rate hike for July, but that it had acknowledged that the hurdle for restarting a hiking cycle was “considerably higher” than the hurdle for continuing along a hiking path.
“The data is going to continue to be a messy mix of demand and supply, both with the labour supply increasing, and also the weather effects, we think it will take a while before it becomes evident that more is needed,” Zollner said.
Overall, Zollner said there was a general consensus that monetary policy was working to curb demand and cool the economy, and that the economy was slowing.
“We’ve got a slightly different view on how much spare capacity there is in the economy at the moment, and therefore how easily the economy can absorb this extra demand from net migration and fiscal,” Zollner said.
While the RBNZ is seeing the data as a sign that demand is rolling over, ANZ is seeing demand as “patchier”, with a mix of demand and supply impacts, she said.
“The most interest-rate sensitive parts of the economy are definitely rolling over, but other parts are looking more resilient,” Zollner said.
Further volatility in interest rates anticipated
Commenting on interest rate movements, Zollner said borrowers could expect some volatility ahead.
Markets still view there is a risk that the Reserve Bank may change their mind and hike again, she said, noting markets had not immediately moved to pricing in rate cuts.
Some people are of the view that the Reserve Bank has already done too much, and the market will continue to respond to data, she said.
“The market’s basically in two minds at the moment whether the next move is a hike or a cut and I think we can expect volatility to continue,” Zollner said.
One scenario is that the data keeps rolling over and the market prices cut, which could see fixed rates fall, she said. Another could be that the data shows surprising resilience (or an upwards surprise on inflation), in which case markets will price a greater chance of more hikes to come, therefore fixed mortgage rates could go up.
In a Property Focus report for May 2023, ANZ noted that floating rates and shorter-term fixed rates had increased over the last month, and that longer-term fixed rates were lower on average. There had been a marked reduction seen in the average three-year fixed rate.
Fixing for three years is cheaper than fixing for a shorter period, and ANZ break-evens analysis showed that mortgage rates need to fall for it to work out cheaper to fix for one to two years, compared to three years.
Although the cheapest mortgage rate is not much higher than the OCR, ANZ noted that accessing it meant fixing for longer.
Given the uncertainty, ANZ suggested borrowers consider dividing their mortgage into chunks, lessening the potential for regret down the track.