ANZ has changed its forecast for OCR, adding further hikes and expecting the cash rate to hit 2%.
Wednesday, October 20, 2021, 10:13 a.m.
“As we improve our estimate of how much work OCR needs to do assuming everything is going well, our view continues to be that there is a high risk of something happening to interrupt the hiking cycle. before its completion, “he said in his latest research report.
The ANZ says inflation will hit 5.8% in the March quarter of next year and the Reserve Bank’s OCR could tip 2% by August and potentially rise.
And ANZ chief economist Sharon Zollner also warned that Tuesday’s “dramatic increase” in wholesale swap rates was so large that there is real pressure to keep mortgage rates up again before long. .
“This increases the chances that the dynamics of the housing market will turn sharper than expected and switch more sharply than expected from support to a drag on household spending and construction activity.
“Many households are heavily in debt after taking out massive mortgages in a year when house prices have risen by over 30%, so even a small increase in interest rates will have a significant impact on these households.” , Zollner explains.
“And globally, a reassessment of the likely average cost of borrowing over the next few years poses a challenge to valuations of the assets that underpin household wealth.”
However, recent research from the RBNZ suggests that the maximum impact of any OCR hike may not be felt for at least six months, as households move away from fixed mortgage rates.
Inflationary pressures are everywhere in the economy right now, Zollner says. Construction costs are skyrocketing, oil prices are skyrocketing, supply chains are strained, food prices have risen six months in a row, and labor is scarce.
“Price increases for essential items will hit the poorest households the hardest,” she adds.
She says the bank is confident saying the country has probably not seen the worst of inflation yet.
The bank expects the RBNZ to use every opportunity to increase OCR and expects hikes in November, February, April, May and July.
Zollner says OCR probably needs to go about half a percent above neutral, which the bank estimates at around 1.5%.
“The RBNZ considers neutral at 2%, so we would expect the November monetary policy statement to show OCR steadily rising to around 2.5% or a little higher.
“The fact that much of the inflationary pressure is currently due to supply-side factors does not mean that rising interest rates will not work to avoid it.
“By reducing the appetite for borrowing and making indebted households more price sensitive, rate hikes further throw sand into the gears of the inflation process by preventing the pass-through of costs.
“Lower demand means less inflationary pressure than otherwise, regardless of the mix of demand and supply developments that triggered it,” Zollner said.
She says it’s important to point out that while the bank is increasing its central OCR forecast, there is a significant risk that something will happen to derail the hike cycle before it is completed.
“These risks are escalating, if at all.”
The market naturally reflects on the chances of a 50bp hike in the next monetary policy statement. “At this point, we expect a more consistent pattern of hikes to be built in, but that won’t do much to ease the pressure on one- to three-year swap rates (and by extension, mortgage).
“The market has already delivered a lot of tightening.
“The loan financing program will alleviate some of the pressures, but working the other way around, the gap between the growth in bank deposits and the growth in loans is large. “
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