Homeowners worried that the Reserve Bank of New Zealand will hit them with a surprise hike in the official cash rate on Wednesday should rest easy, although those holding out for a quick cut in interest rates, and relief from their current mortgage pains, are likely to be disappointed.
With the four major banks announcing lifts in their mortgage rates this week to levels not seen in over a decade, and many homeowners set to refix at higher rates in coming months, there is understandably apprehension ahead of the RBNZ's announcement on the OCR and its Monetary Policy Statement.
The RBNZ has given strong indications that May’s 0.25pt lift in the OCR was the last hike this cycle, with the OCR forecast to stay at 5.5% until mid-next year.
The big unknown though is inflation, and the public won’t know how successful the RBNZ has been in bringing inflation down with aggressive interest rate rises until July 19, when the Consumer Price Index figures covering inflation for the second quarter of this year are published.
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The country has already absorbed the shock of finding out it slipped into recession in the first three months of this year, but the latest economic indicators suggest the economy is emerging from the doldrums and that the recession may have already have ended. ANZ’s business and consumer confidence surveys highlight a more optimistic view about the economy and a drop in inflation expectations.
Further bolstering the case for optimism is the good news from across the Tasman, with inflation in Australia dropping to 5.6%, according to a new monthly measure and the Reserve Bank of Australia keeping its cash rate on hold at 4.1% (although future rate hikes are still expected).
One of the indicators that will determine whether or not New Zealand’s cash rate holds at 5.5% is NZIER’s Quarterly Survey of Business Opinion (QSBO). The RBNZ’s mandate requires it to keep inflation within an acceptable range of 1-3%, which is why the QSBO in particular was important, says BNZ’s head of research Stephen Toplis.
QSBO measures, among other things, how easy or hard it is for businesses to find labour. Wage inflation when staff are difficult to source affects overall inflation. The news from the QSBO was good, however, with net migration making it easier for employers to find staff.
Toplis told OneRoof that the QSBO was extraordinarily comprehensive. “It does tell us how strong the economy is likely to be. Obviously, the weaker the economy is, the less likely there is to be inflation as a general rule.”
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Toplis believes RBNZ would have been satisfied with the latest QSBO results. In his market report for BNZ, he said there was “strong evidence that inflationary pressures are abating and that we are heading towards maximum sustainable employment at an accelerating rate. All of this means talk of raising interest rates again should be extinguished, for now at least.”
He summed up the ideal outcome for Wednesday as this: “The Monetary Policy Committee today did nothing. Nothing much has changed.”
Toplis said that while the Reserve Bank of Australia’s interest rate decision this week was in itself hugely important for New Zealand, but “if other central banks are raising interest rates aggressively, it tends to mean that the New Zealand dollar weakens, which generates inflation.” Hence the RBA’s decision to hold its rate rather than raise it was good news.
Kiwibank chief economist Jarrod Kerr: “Inflation globally has peaked, and I think that is starting to come through in expectations.” Photo / Fiona Goodall
Kiwibank chief economist Jarrod Kerr says the RBA hiked rates later and more conservatively than New Zealand and that country may still need further rate rises to quash inflation. However, he believes “inflation globally has peaked, and I think that is starting to come through in expectations”.
Kerr doesn’t expect New Zealand’s cash rate will drop before February next year. “We hope that the Reserve Bank will be in a position to cut the cash rate and therefore cut interest rates in the economy by February next year,” he said.
“When you look at their cycles, what we've seen in recent decades, [is] they finish hiking, then eight to 10 months after that they move the other way. So if the last hike was in May, and we’re forecasting the first cut in February – that's nine months and in keeping with the timeframe.”
ASB’s chief economist Nick Tuffley isn’t expecting any big surprises either, writing in his latest report that “the RBNZ is still comfortable to remain on hold for the time being at least. Events have been generally in line with the RBNZ’s view that it has done enough to get inflation back into the target band next year. If anything, the slight GDP contraction in Q1 reinforced that view.”
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