The current economic strength should push the official exchange rate above 4%, which means mortgage rates probably haven’t peaked yet.
Ahead of last week’s strong second quarter GDP result, markets and economists
had set a likely 4% peak for OCR.
This has led some commentators to suggest that one- and two-year fixed rates have already peaked.
Two-year fixed mortgage rates currently range between 5.45 and 6.45%, depending on the terms of the loan.
But the current economic strength should make inflation harder to control, economists say.
After last week’s GDP data, economists at ANZ and ASB raised their projected peaks for the OCR to 4.75 and 4.25% respectively.
Now the market is following suit – prices are hitting a new high at 4.5% – from the previous high of 4%.
The Reserve Bank also saw a 4% spike in its projected rate path released last month.
Today’s strong Services Performance Index (PSI) – along with last week’s manufacturing data – prompted BNZ economists to raise their forecast for third-quarter GDP.
The PSI rose sharply in August, its second strong monthly increase in a row, thanks to good growth in the number of tourists.
BNZ now sees 1% growth for the third quarter – taking annual growth to 5%, albeit from a low base affected by Covid.
BNZ did not raise its OCR forecast by 4%, but warned that risks were now on the upside.
“The market continues to push up expectations for the OCR peak, now just above 4.50%,” noted BNZ strategist Nick Smyth.
“The market is now pricing in a much larger tightening than our central forecast of a 4% OCR peak, although we fully agree that the risk bias is to the upside.”
The problem with stronger near-term growth was that the RBNZ would have to do more to slow demand, said BNZ senior economist Craig Ebert.
“If GDP growth continues, indeed, how long can it reasonably continue? The Reserve Bank demands that aggregate demand slows to bring it back into line
with the overall offer,” he said.
“If that doesn’t show signs of happening, then the RBNZ will have to tighten monetary policy.
conditions larger than we assume, which could lead to a larger economic correction later down the track. »
Launching Friday’s call to raise its rate outlook to 4.75%, ANZ chief economist Sharon Zollner stressed that she was “not optimistic about the economic outlook” over the long term. .
“Overall, while the growth profile is not strong, it is not clear that beyond the housing market, the rate hikes achieved so far are succeeding in opening up a large amount of unused capacity in the economy,” she said.
“It requires significantly lower household spending. The RBNZ needs to see slower growth, and it will get it. But we think it will take a higher OCR to get the job done.”
The risks were firmly tilted towards inflation and inflation expectations were not falling as far or as fast as needed to bring real interest rates to a level of sustainable contraction, which means more work for the OCR , she said.
She acknowledged that there were upside risks that could see the OCR stall below 4.75%, but said there were also risks that the OCR could rise above that level as well.
ANZ does not yet expect an OCR cut, which would also keep upward pressure on longer-term fixed mortgage rates.
By contrast, many economists have forecast rate cuts from mid-2024.
ASB – which acted first after the GDP result to raise its rate outlook – had already leaned in that direction with its research suggesting there was no sign of a labor market cooling soon.
“We see the risk of elevated inflation outcomes persisting, with our recent work highlighting the tight labor market as a key influence,” SBA Chief Economist Nick Tuffley wrote earlier this month.
“Nationally generated inflation, which hit a record high of 6.3% in June, could pick up in 2022 but then slow as capacity pressures ease and
the cost of construction and rent inflation are falling.”
Labor market conditions have a huge influence on economic activity, inflationary pressures and interest rates, he said.
“Our research indicates that these influences persist. Compared to before the pandemic, the supply of working-age people available to work is likely to grow at a much lower rate.”
Labor markets were also tight in many OECD countries and New Zealand will struggle to attract and retain staff, Tuffley said.
“We expect net migration flows to continue through 2023. In addition, demographic shifts will also slow the growth of the pool of potential workers.”
Organizations will continue to find it difficult to retain and recruit staff over the next two years, he said.