Kelly Eckhold is Westpac New Zealand’s new chief economist. He returned to New Zealand with his family in February this year to take up the role after 11 years in the United States in Washington DC with the International Monetary Fund. He talked to OneRoof about his time at the IMF, projections for New Zealand’s housing market and where he thinks New Zealand will land on interest rates as the country grapples with cross-currents of strong migration, international geopolitical issues, and high interest rates.
Q: Where are you from originally?
I grew up in Oamaru, North Otago. I studied at Otago University gaining an honours degree in finance and economics and then started working at the Reserve Bank of New Zealand as an economist and financial markets analyst. I travelled overseas and worked at the Bank of England before returning to the Reserve Bank where I was Manager of Foreign Reserves before I joined the IMF.
Q: How did you end up at the IMF?
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At the Reserve Bank I worked a lot on foreign exchange, money market, and bond market operations. I also focused on monetary policy and financial stability issues. The IMF contracts experts around the world to help them. I moved after doing consulting work for them on central bank issues focused on central banking, money and foreign exchange issues.
Q: What lessons did you take from your experience there?
New Zealand takes a lot of things for granted. I spent a lot of time working on developing and emerging market economies where there was no guarantee of a functioning financial system, banking system or financial market. Not even a basic interest rate or an exchange rate to rely on to make decisions. International geopolitical issues are also increasingly impacting the behaviour of countries’ trade and investment flows. For example, the Israel-Gaza conflict might seem far away, but it absolutely impacts our business and consumers. We’re a borrowing country and if you’re raising a mortgage to buy a house, we’re reliant on the savings of foreigners to do that. The international volatility means those investors are more cautious and that has implications for what it costs you to raise finance.
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The importance of the non-bank financial sector has also come to the fore. Around the world, with the increase in technology, there’s a move away from solely doing financing through banks to using other types of financial institutions, like insurance companies or asset managers. This is important for New Zealand to recognise because we have relatively developed financial markets and there’s a lot of those players operating here.
Q: What was the biggest challenge during your time in the US?
Covid. We were suddenly forced into a very different operating environment, alongside the significant physical risk and the inability to be able to travel home. My wife’s mother had a significant health issue, and my wife was number 27,000 in the queue for MIQ. That was a tough time.
Q: Why did you come back to New Zealand?
We always planned to come back to New Zealand. When we left, it was a five-year plan but that turned into 11 years. Washington is a comfortable place to live, but with young children you start thinking about where you want them to grow up. I’ve always wanted them to grow up in New Zealand. The opportunity at Westpac was rare so it was a win-win from a personal as well as a professional perspective.
Q: Why is housing so important to economies?
The housing market is related to things like residential investments, consumption and household consumption. When an economy is doing reasonably well, there are greater job opportunities and people usually flood into the country. Covid interrupted our flow by about three years but now we have strong migration and population growth at a time when the economy is cooling relatively fast. So, to some extent a stronger housing market, driven by migration, is helping counteract some of the cooling in the general economy. Without this migration boom, it would have been a pretty slow year throughout the economy.
Westpac New Zealand chief economist Kelly Eckhold says inflation is going to be a tough nut to crack. Photo / Fiona Goodall
Q: What are your predictions for the housing market over the next 12 to 24 months?
We expect a stronger housing market through next year. Our current forecast is prices are going to go up by about 7.7% over the calendar year. The big driver is the historic increase in population growth through strong migration. Historically it takes about one year for the migration impact to flow through so the housing market should continue to strengthen as we go into the summer and through next year.
Q: What do you think are the biggest challenges ahead for the New Zealand housing market?
We’re grappling with cross-currents. On one hand we’ve got very strong population growth that should drive demand either through the rental market or people buying property. But on the other hand, interest rates are relatively high. They will have a breaking effect for households that are already quite leveraged. The housing market will also be influenced by the labour market over the next year. As the economy slows, the unemployment rate will start to drift up. Our forecasts have it heading up to about 5.3% over the next 18 months. That’s another factor that leans against a very strong housing market. However, if you look at the historical relationship between migration and housing, you might expect to see much stronger house price growth than just 7% or 8% in the context of such strong inflows. There are periods historically where the market might have gone up 15% to 20%. Our forecast reflects those push and pull factors on the outlook.
Q: What are your predictions for the economy over the next 12 to 24 months?
A centre-right coalition government tends to run a tighter fiscal ship so that could have some impact. There seems to be agreement between parties on policies that would make investment in housing more attractive, whether that’s the bright-line test adjustments or mortgage deductibility. National and Act are also happier to see foreigners purchasing property, so things are more positive for the housing market.
With tensions in the Middle East, one of the real upfront challenges will be the impact on energy prices. We’ve seen a significant rise in the oil markets in the last few months. Even though interest rates are quite high, it’s still going to take time before inflation gets back to the target range. That assumes that we don’t end up with adverse shocks that lift inflation again. I’ve heard some commentators talk about the possibility of $150 oil prices. Significant increases would have a dramatic impact on the inflation outlook and the business environment. There is also the impact on interest and exchange rates. The New Zealand dollar has been under a bit of pressure in the last year or so, even though interest rates have been increased. These shocks generally are negative for our terms of trade. There’s a possibility that you get weakness in the New Zealand dollar as a counterpart for that.
Q: Where do you see interest rates heading?
Our view is interest rates will have to continue to rise a bit further. Our current forecast is that the Reserve Bank will increase the OCR at the November monetary policy statement by 25 basis points. I think everyone has come around to the view that inflation is going to be a pretty tough nut to crack and interest rates are going to have to remain at relatively high levels, perhaps all through next year. Our current forecast is that when rate cuts come, it’s going to be more of a 2025 story rather than a 2024 story.
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