Interest rates: Will the Reserve Bank raise hell on Wednesday?

1. Decision day for the OCR

It’s a big call at 2pm on Wednesday, with the next Official Cash Rate (OCR) decision due, and the accompanying forecasts for other key measures such as inflation, GDP, employment, and house prices. Bank economists are split: most expect no change to the OCR, but ANZ suggests that there could be two more rises in the pipeline – albeit maybe not necessarily starting this month.

There are a lot of issues on the table, but for me, the key thing is that inflation itself is falling, the economy isn’t hot by any means (look at some of the weaker corporate earnings results lately), and there’s still some pressure coming through on households from the fact that about 55% of existing mortgages are yet to be fully repriced from older, lower levels up to current interest rates.

As such, I’m expecting no change to the OCR on Wednesday. To be fair, the Reserve Bank will probably still have a very cautious approach, and they’ll no doubt talk tough, reiterating their concerns about inflation still being above the 1-3% target range. So even if we don’t see any further rate rises in this cycle, cuts might not be seen for 9-12 months yet either. This suggests a continued plateau ahead for those popular, shorter-term fixed mortgage rates.

2. Have we dodged a recession?

Another indicator suggesting that the economy is just ticking over – and has not lurched into recession – is the NZ Activity Index, which was 1.5% higher in January than the same month last year. That’s encouraging in terms of the economy continuing to help the jobs market too. But on the flipside, it might also tend to keep inflation a bit higher for longer, with pressure on mortgage rates.

3. Lending environment probably still cautious

The latest Reserve Bank figures on mortgage lending flows (for January) will be published this week, and are likely to show a further rise in activity – albeit modest and from a low base. As always, I’ll be looking closely at the breakdown by loan to value ratio, which has lately been showing cautious attitudes towards low deposit (or high LVR) finance, probably from both the lending and borrowing sides of the equation. For example, only about 7-8% of recent owner-occupier lending has been done at <20% deposit, which is well below the 15% allowance. Banks probably retain a degree of caution around these loans, as do would-be borrowers – after all, a small deposit just means servicing more debt, at high interest rates.

CoreLogic chief economist Kelvin Davidson: "So even if we don’t see any further rate rises in this cycle, cuts might not be seen for 9-12 months yet either." Photo / Peter Meecham

4. Employment continues to edge higher?

Also due this week are the latest filled jobs figures (January) from Stats NZ, which will probably show another increase. Job creation and security is obviously good in terms of people wanting to secure new mortgage finance or who need to adjust their existing loans to higher interest rates, but there are always trade-offs. On the flipside, higher employment tends to be consistent with a bit of inflation, which is clearly what the Reserve Bank is fighting hard against right now.

5. Construction activity remains a concern

January’s dwelling consents data will be published on Friday, and the downwards trend may well continue for a while yet. With population growth remaining strong, we just have to hope that construction finds a floor in the near term, so that housing shortages don’t come back anytime soon.

- Kelvin Davidson is chief economist at property insights firm CoreLogic