ANALYSIS: Over the past week the key item of interest relevant to interest rates and where the housing market is going was the annual inflation number released on Wednesday. The data shows that the near 650 items which have their prices measured to gauge inflation rose on average 1.4% in the three months to December and 7.2% from a year ago.
Given that inflation has averaged 2.1% a year since 1990 this is an excessive pace of increase in the household cost of living (excludes interest cost though) and shows how the Reserve Bank has failed in its primary job of keeping inflation between 1% and 3%.
That failure stems substantially from their over-stimulus of the economy from 2020-2021, which pushed up not just house prices but wage rates and house construction at a time when materials prices were rising because of supply chain problems around the world. It pays also to remember that the level of competition between providers of building materials in New Zealand is somewhat “cosy”, so a building boom invariably brings strong construction price increases – in this case of 14% in the past year for a new house.
The 7.2% annual inflation rate we now have was the same as three months ago. That’s perhaps a bit disappointing for those of us hoping that the collapse in business and consumer confidence over the past year would surely by now be placing substantial downward pressure on the ability of businesses to raise their selling prices regardless of what their costs are doing.
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On the face of it you’d think that this means the Reserve Bank will need to keep applying the screws and mortgage rates have a lot higher to go. But we have to mindful of the time delays that exist between interest rates going up, confidence falling away, the economy getting weaker, then inflation eventually falling.
These lags are never the same from one tightening cycle for interest rates to the next and that is especially the case now when we consider the last tightening cycle ran from 2004 to 2007. We’re all just guessing quite frankly as to how quickly inflation will fall. But at least this time the guess was not 0.6% too low as was the case for the inflation number released three months ago.
The popular pick back then was 6.6% and instead it came in much higher than expected at 7.2%. This shock ended up producing a 1% boost to fixed mortgage rates taking into account the Reserve Bank’s record policy tightening of November 23. This time the common forecast was 7.1% so 7.2% is essentially bang on expectations. That means virtually nothing changes in the financial markets and we sit back again waiting for data on the economy and business cost pressures, plus the next inflation number due in three months time.
Independent economist Tony Alexander: “Borrowers can anticipate floating mortgage rates rising another 1% plus by mid-April.” Photo / Fiona Goodall
Given the way it is taking a long time for inflation to fall we can be fairly certain that the Reserve Bank will raise its official cash rate again on February 22 then again on April 6. But there is a chance that the rate does not quite reach the 5.5% they have pencilled in for April from the current 4.25%.
The indicators of business and consumer sentiment which we are receiving now are so extremely bad that the Reserve Bank will probably be starting to worry about excessively crushing the economy in an effort to suppress inflation and underpin good economic growth – eventually.
From there borrowers can anticipate floating mortgage rates rising another 1% plus by mid-April. For fixed rates two years and beyond we are probably at the cyclical peaks because these rates capture investor expectations of monetary policy working then being eased over 2024-25. For the one-year fixed mortgage rate the situation is far less clear and there remains a risk of some further small rises.
As for the housing market overall – until there is common acceptance that interest rates are on the way down buyers are likely to remain on strike and prices ease a bit further.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
