Mortgage-holders can expect further interest rate rises on the back of tomorrow’s Monetary Policy Statement by the Reserve Bank of New Zealand – the only unknown is just how much the bank will lift the official cash rate (OCR).
So far, the bank has pushed up the OCR nine times since October 2021, lifting it from a record low of 0.25% to 4.25%. The last increase, in November, was 0.75 percentage points, and until recently, the odds had been on another 0.75pt lift tomorrow.
But last month’s severe flooding in parts of the North Island and the devastation wrought by Cyclone Gabrielle just last week have shifted economic thinking, with some commentators calling on the RBNZ to hit pause on rate hikes.
Kiwibank's economists, in their weekly note, said: "A pause from the RBNZ would be welcomed by most Kiwis, and highlight that officials are cognisant of the economic damage being inflicted.
Start your property search
"There is significant damage to key infrastructure, buildings and housing. And there will be severe damage to crops and farms. Guesstimates of the total economic impact are now in the billions, not millions."
Read more:
- Slump surprise: Kiwi house sale profits (and losses) revealed
- Who’s struggling the most? Stats reveal the biggest jumps in mortgage stress
- Are basements the new leaky home problem?
The bank's economists, Jarrod Kerr and Mary Jo Vergara, said while they expected to see a hike, the "discussion should be around 0 or 25 basis points, not 50 or 75 basis points".
The majority view is that the RBNZ will lift the cash rate 50 basis points, according to a survey last week of 13 market experts, including Westpac acting chief economist Michael Gordon, ANZ chief economist Sharon Zollner, Infometrics CEO Brad Olsen and CoreLogic chief economist Kelvin Davidson.
But not everyone believes that the RBNZ will lift the cash rate again in April, with only seven of the experts polled by Finder predicting another rate rise on April 5. However, two thirds of the panel (69%) expect the cash rate to peak at 5-5.25% between April and May this year.
Inflation is the RBNZ’s number one priority and OCR rises are designed to bring inflation down by reducing spending money in homeowners’ pockets.
Prior to January 27, news had been filtering in that inflation had peaked, with CPI stats published last month pegging annual inflation for the last quarter of 2022 at 7.2%, unchanged from the previous quarter. However, the destruction left in the wake of Cyclone Gabrielle is likely to put upwards pressure on inflation.
ANZ, in its recent market update, reported: “A decent chunk of the fall in inflation that’s in our (and the RBNZ’s) forecasts is due to falls in construction cost and food price inflation. Both of those are likely to see some upward pressure as a result of this event. So too are insurance premiums. And rents.”
Westpac’s Michael Gordon says the inflation situation leaves the RBNZ with a delicate balancing act. “To what extent should it respond to these additional inflation pressures, on top of what was already occurring in the economy?”
He does point out that inflation from the rebuild might not be as high as initially forecast. “Even the 2011 Christchurch earthquake rebuild, a roughly $40bn rebuild that was spread over many years, did not prove to be the inflationary force that was initially feared.”
He also warns that the RBNZ might not go low on Wednesday. “The RBNZ will be wary of relenting too soon. That means it will need to carry through with the path of tightening that the market has already priced in – another 100 basis points or so over the next few months.”
Kiwibank Jarrod Kerr says the damage caused by Cyclone Gabrielle should be front of mind when the RBNZ decides on the future direction of the cash rate. Photo / Fiona Goodall
ANZ’s Sharon Zollner also cites reasons why the RBNZ governor Adrian Orr shouldn’t hold back. If Orr were to hit pause or choose lift the cash rate by just 25 basis points, that would probably mean higher interest rates later, which in turn could put upward pressure on house prices, she says.
“While naturally the RBNZ committee will want to do everything they can to ease this dreadful situation, it’s far from clear that deferring OCR hikes would help at all, on net. Reigniting the housing market and speculative house-building is not going to help those affected by this.”
BNZ head of research Stephen Toplis thinks the odds of a 75 basis point rise is 50/50 of 0.75%. “We have moved from a 75 call to a 50 call but our conviction is not strong. We have long said market pricing on the day could be the deciding factor for the Reserve Bank.”
Infometrics economists Gareth Kiernan and Brad Olsen believe that the Gabrielle effect has tipped the RBNZ towards a rise of 50 basis points. “In choosing a smaller rate rise, the [Reserve] Bank will be mindful of the optics of heaping more pain on affected households. The Bank is likely to note its ability to increase interest rates at subsequent reviews faster than might otherwise be the case.”
