OCR preview: RBNZ set to rise again – when will interest rates peak?
The cost of servicing a mortgage is rising sharply, but have long-term rates peaked? Photo / Fiona Goodall
Growing fears of recession, both here and around the world, spooked markets and drove down commodity prices.
This is bad news for the outlook for economic growth, but it is good news for those expecting a
peak inflation – and the end of interest rate hikes.
Some experts even believe that mortgage rates may not need to rise as high as expected.
But don’t expect the Reserve Bank to soften its stance when it delivers its monetary policy review on Wednesday (2:00 p.m.).
Economists expect another 50 basis point hike – the third in a row – taking the official exchange rate to 2.5%.
Most still expect the RBNZ to continue climbing this year to a peak OCR of 3.5%, even as the housing market and other parts of the economy cool.
It was more or less “hit the snooze button” this week, said BNZ chief research officer Stephen Toplis.
“That said, we believe the outlook for the real economy has deteriorated relative to that on which the RBNZ based its May rate path,” he said.
“We believe that had the RBNZ been required to release a full rate track with this release, there would have been a lot of discussion about possibly moderating the pace and depth of the tightening cycle.”
In what she described as “one of the easiest decisions” the Reserve Bank has had to make, ANZ’s Sharon Zollner said “the flow of data since the May monetary policy statement has not provided no compelling reason to deviate from this strategy”.
However, she acknowledged the global negativity that had helped align market expectations on the RBNZ.
“Recently, fears of a hard landing have started to dominate, affecting New Zealand markets as well,” she said.
“The two-year swap rate reached 4.55%; it currently stands at around 3.90%.
Sentiment was weakening and speculation of a slowdown was mounting, said ASB’s Nathaniel Keall.
“But the labor market’s starting point is very tight and inflationary pressures remain high.”
The “least regret” for the RBNZ was to continue to accelerate policy tightening, he said.
“Also, it’s easier to ease conditions further down the track if necessary than to bring inflation expectations back to Earth after they’ve run away from you.”
Still, the change in the market outlook and expectations that the OCR will peak later this year have some talking about an impending spike for mortgage rates – at least on longer fixed terms.
Ben Udy of Sydney-based Capital Economics sees the RBNZ increasing the OCR aggressively to 3.5% by the end of this year.
But he thinks he will cut rates by next year as the housing slowdown and recessionary tendencies intensify.
Median home prices fell 3.8% in May and are now down 7.5% from their peak in November last year, he noted.
“Rate hikes are clearly a huge drag on sentiment. Consumer and business confidence is currently weaker than at the height of the global financial crisis. That would generally be consistent with a sharp drop in GDP,” he said. -he declares.
“But we know from updated activity data that GDP is not weakening as sentiment suggests. For example, electronic card transactions rose 8% in April and May after falling in [the first quarter].”
While the housing downturn wasn’t much of a concern for the RBNZ right now, it would soon be.
“We now expect prices to fall 20% from their November peak. This largely reflects the increase in OCR we expect.”
“Between easing inflation, rising unemployment and subdued growth, we doubt the RBNZ will be keen on raising rates further next year. In fact, we have forecast two rate cuts in the second half of next year as GDP growth slows.”
Independent economist Tony Alexander agrees with this outlook and notes that it means fixed mortgage rates for terms of two to five years are now at or near their peak for the cycle.
“I always choose [an OCR] peak of 3.5% but would not rule out that the rate actually exceeded my initial peak of 3% expected,” he wrote in his latest weekly report.
It should be noted that some banks cut their two-year fixed mortgage rates last week because the two-year swap rate at which they borrowed to lend to customers fell by more than 0.5% in the last three years. weeks, he said. .
“I wouldn’t rule out further small increases from here if economic data surprises on the strong side as central banks continue to push their cash rates higher.”
“But any upside will likely be minimal and that only reinforces the fact that a long fix now would imply a fix at or near the top of the rate cycle – not a good idea.”