ANALYSIS: There is a rule of thumb we economists use regarding the impact of tightening monetary policy. It takes about 18 months for the impact of a policy tightening to start showing through in inflation easing. Obviously this is not a hard and fast rule, especially when we consider two things specific to New Zealand.
First, 90% of us borrow using fixed mortgage rates and those rates rise ahead of monetary policy changing. Thus, fixed mortgage rates started rising in June of last year, four months before the Reserve Bank made a move on the Official Cash Rate (OCR). By the time the OCR was raised from 0.25% to 0.5% in early-October 2021, the popular two-year fixed mortgage rate had already risen from 2.49% to 3.15%.
Second, because almost all of us fix our mortgage rates, it can take a while for the rate rises to affect our cash flows and make us pull back on buying things like cars and couches.
Regardless, the 18 months are up and when the December quarter inflation numbers come out on January 25 the inflation rate is likely to be edging lower. The first half of 2023 is going to be extremely interesting because the Reserve Bank has accelerated their pace of policy tightening at exactly the same time inflationary pressures are peaking. That brings a risk of over-tightening and policy having to be eased earlier than the late-2024 time period the Reserve Bank pencilled in.
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That risk has now increased because the data we have received showing how people and businesses are feeling since the 0.75 percentage point increase in the OCR last month bespeak of a substantial slowing or weakening in economic activity next year.
First, there are the four monthly surveys I have run since the rise. They all show a substantial stepping back of buyers from the residential real estate market. That means not just prices easing more than expected, but house-building also getting crunched to a greater degree. Feedback from builders is that buyers of new builds have stepped away far more than buyers of existing properties.
Second, consumer confidence has strongly declined. We saw it first in my monthly Spending Plans Survey which fell from a net 28% of over 1,000 respondents in early-November expecting to cut their spending in the next 3-6 months, to a record net 43% planning to do so in December. Cutbacks are planned on everything except groceries.
The Westpac McDermott Miller Consumer Confidence reading has fallen to a three-decade low of 76 (where 100 is neutral) from 88 in the September quarter.
Independent economist Tony Alexander: “Feedback from builders is that buyers of new builds have stepped away far more than buyers of existing properties.” Photo / Fiona Goodall
Most importantly, ANZ’s long-running Business Outlook Survey has recorded deeply recessionary business views of the economy. A net 26% of businesses expect to be less busy in the next 12 months. This is the weakest reading since at least 1988 excluding the earliest days of the pandemic.
Employment intentions are a net 16% negative from 4% pre-November 23. This is the lowest reading since the GFC. A net 21% of business plan reducing their capital spending from 8% before the latest monetary policy tightening and warning about recession.
Because inflationary measures are still extremely high in the ANZ survey we cannot automatically conclude that the collapse in business and consumer sentiment and spending plans will translate into a much lower inflation and interest rates outlook.
But when considering what you should do if your current fixed mortgage rate ends in the next six months it would pay to keep this risk of recession and falling interest rates in mind before jumping from your usual 1-2 year fixing term to something much longer. Potentially, we are approaching the worst point in the interest rates cycle for fixing over medium and long-term time periods. Conversely, we are approaching potentially the best time to consider medium to long-term fixed interest investments in banks.
Hopefully the shocks which will come along next year and cause us all to alter our forecasts and expectations this time fall on the positive side for a change.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
