Look, everybody expects them to do it, so it would be impolite of them not to, wouldn’t it?
That’s right barring something very odd happening between now and Wednesday’s D-Day (August 17), you can bet your expensively mortgaged house on the folk at the Reserve Bank (RBNZ) executing an unprecedented fourth consecutive 50-basis-point hike in the Official Cash Rate.
Yep, four in a row. Bang, bang, bang, bang.
It’s amazing how quickly this all came upon us and I guess equally amazing how quickly we got used to it. Not many months ago 50 basis point OCR hikes were a rare thing – in fact last seen in 2000.
And yet, here we are with universal expectation of a fourth consecutive 50-pointer that will take the OCR up to 3.0% – its highest level in seven years.
It will mean the OCR will have risen by 225 points this year (already a record with two OCR reviews to come yet in 2022, easily beating the previous 150-point record in the 2004 calendar year).
And it will mean the OCR will have risen by some 275 points since the beginning of this hiking ‘cycle’ in October 2021.
It’s a remarkable, and as I say, unprecedented, display of firepower, all designed to stop the current rampant wave of inflation (annual rate 7.3% as of the June quarter).
The big question, of course, is how much more ammunition do the RBNZ folk think they will need to unload in this hiking cycle? And how quickly?
When the RBNZ’s latest Monetary Policy Statement (MPS) becomes available at 2pm on Wednesday all eyes will quickly descend on the page towards the back that has the forecast OCR ‘track’ covering the next three years.
The most recent MPS from May had a ‘track’ that showed the OCR reaching around 3.5% (literally it was 3.4%) by the end of this year and nearly 4% (literally 3.95%) by June of 2023 – and then staying at that level for the next 12 months.
In reality though the RBNZ has since then been increasing the OCR at a faster rate than it indicated back in May and assuming the OCR is at 3.0% by the end of next Wednesday this will be some 30 basis points higher than indicated in that previous MPS.
There’s two key questions then really: First, will the RBNZ still be signalling an OCR of 3.5% by the end of 2022, which would imply ‘just’ 25-point rises in each of the next two rate decisions? Second, will the central bank still be picking a ‘peak’ OCR of around 4%?
At this point it is worth referring to significant data that has become available since the last cash rate decision in July.
The June quarter Consumers Price Index release showed an annual inflation rate of 7.3%, versus an RBNZ forecast of just 7.0%. So worse than expected.
The June quarter labour market data showed unemployment rising to 3.3% from 3.2%, when the RBNZ expected a fall to 3.1%. If that could be seen as moderately ‘good’ news for the RBNZ, given that the extreme tightness of the jobs market has been seen as helping fuel inflation, the wage data certainly wasn’t good news. This showed private sector hourly wages rising 7%, when the RBNZ had picked only a 5.6% increase. Big miss.
So, there were two significant lots of data that were very much telling the RBNZ it has more to do with the rate rises.
Of slightly more encouragement for the central bank will have been the results of the RBNZ-commissioned quarterly Survey of Expectations, which showed a sharp fall in expectations of inflation in two years’ time from 3.29% in the previous survey to 3.07% now.
Yes, true enough, 3.07% would still be putting inflation outside of the RBNZ’s officially targeted 1% to 3% range in two years’ time – but the fall in expectations in the last quarter shows that the RBNZ’s message that it’s deadly serious about dousing inflation is getting through.
Would the outcome of this survey be sufficiently encouraging to persuade the RBNZ to back off and perhaps ‘only’ signal a 25-point rise at the following review in October?
Hmm. Well, probably not. The inflation and wages data were probably sufficiently worrying to suggest there should be no slackening of the pace for now.
So, probably best to expect that the signal will be for another 50 pointer in October. But November? Well, that might be more open for debate.
One emerging problem the RBNZ has is the growing conviction in some parts of the marketplace that the central bank might have to start actually dropping the OCR from next year. Right now there’s no way the RBNZ itself would want to be signalling any such thing.
Wholesale interest rates have been easing back. At time of writing the markets are just-about pricing in another 50 point OCR rise in October, but then leaning towards a 25-pointer in November. The markets broadly agree with the RBNZ’s last forecast of an OCR peak of a shade under 4% – but the current pricing suggests this would occur in February 2023. After that, the markets are expecting the OCR to start slowly declining.
Mortgage interest rates, which have rocketed in the past 12 months, have eased back very slightly in the past few weeks in reflection of these easing wholesale rates.
But as the BNZ’s head of research Stephen Toplis said this week the RBNZ would not want any further mortgage rate falls “any time soon”.
It seems to me that given the recent easing of interest rate expectations, there may be some pressure on the RBNZ to now forecast a slightly higher OCR peak for this cycle, perhaps of 4.25-4.5%, so that it can keep something in reserve for next year in order to convince the markets that wholesale rates shouldn’t be any lower, and indeed that mortgage rates shouldn’t be falling.
At the very least it will want to re-assert the message that with inflation far from tamed, the OCR will be staying up for a while yet.
This is all nicely summed up by Westpac’s acting chief economist Michael Gordon (who is forecasting a peak OCR of 4% by the end of this year) and who says, the RBNZ “will want to keep emphasising its inflation-fighting credentials”.
“Its task requires not just lifting interest rates to a certain level, but holding them there for long enough to do their job of bringing demand back into line. Any softening in the RBNZ’s tone next week could see market interest rates fall even further, which would risk undermining the good work that the RBNZ has done so far,” Gordon says.
So, there we have it. The tough talk will continue and so will the hikes, for now. Next stop 4%?
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
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