Economic Weekly: Aftermathematics

Last week’s RBNZ meeting wasn’t quite the drab affair most anticipated. It wasn’t that the RBNZ materially changed its economic view of the world. It was more that it felt the downside risks surrounding the outlook had sufficiently receded to both (a) drop its easing bias, and (b) display a forecast interest rate track that had the Official Cash Rate rising 150bps, from 0.25% in mid-2022 to 1.75% in mid-2024.

It’s important to remember that the RBNZ’s published interest rate forecast is not a promise to follow through. All of the Bank’s forecasts are conditional. They can be quickly shelved if things don’t turn out as planned. And let’s not forget there have been plenty of cases, even in the past five years, where best laid plans have had to be changed. Twelve months is a long time in the post-COVID era.

Still, in the here and now, the outlook continues to improve. We’d been mulling the risk our prior view of an August 2022 start to the RBNZ tightening cycle might have to be brought forward. And the clear intent and signalling of the RBNZ last week was catalyst enough for us to do so, and we shifted our forecast for the first 25bps rate rise to May (full write-up here).

Supporting our new stance is the fact that we already see things turning out a bit stronger than the RBNZ’s (updated) forecasts. Importantly, we don’t share the RBNZ’s view that the coming inflation spike will be largely transitory (see chart). And we also believe the Bank could be surprised by the strength of the labour market. We expect the unemployment rate to fall to 4% by the end of 2022. The Bank has 4.6%. Recent employment partials have, if anything, come in on the stronger side of our expectations.

So, what are the implications of all this? Here’s our quick take on the aftermathematics:

·         Higher wholesale interest rates. We’ve nudged up our swap forecasts by 10-30bps. See our forecast tables.

·         Related to this, we’re now more convinced we’re past the lows in mortgage rates. Our forecasts suggest some modest upward pressure on all but the near-term mortgage rates over the rest of the year.

·         This supports our view the pace of house price increases will slow down over the second half of the year.

There’s more upside for the NZ dollar. Admittedly, our constructive NZD view is mostly linked to the global reflation trade and higher NZ commodity prices. But the fact the RBNZ is comfortable being perceived as one of the first central banks likely to lift rates (joining the Bank of England and Bank of Canada) will add to NZD demand.

mike.jones@asb.co.nz