Economic Weekly: Frenemies, and an update on our views

Bit on last week! We got updates on an avalanche of acronyms: OCR, FLP, LSAP, LVRs, REINZ…, there was some encouraging vaccine news, and the RBNZ and housing became official frenemies. We’ve briefly outlined below the net impacts on our views:

• We no longer expect the RBNZ’s Official Cash Rate to be taken into negative territory. Instead, we think it will remain at 0.25% for the foreseeable future. This reflects our view that the RBNZ’s Funding for Lending Programme (FLP) will be successful, as well as ongoing resilience on the part of the domestic economy.
• Consistent with the above, we’ve fine-tuned our interest rate forecasts. You will no longer find a negative sign anywhere in our swap forecasts and additional downside is expected to be limited. We’re not sure if last week’s 10-20bps lift in the swaps curve will be sustained, but the risks do seem to favour further curve steepening.
• By contrast, we still expect retail interest rates to keep falling. We’ve long held the view that the FLP would add to downward pressure on rates. We see 1- and 2-year mortgage rates falling towards 2% over the coming 12 months. Term deposit rates have more downside too.
• We think last week’s COVID vaccine news was indeed a positive development for the medium-term economic outlook. Yes, it’s only the first step with many regulatory and logistical hurdles still to be cleared. But the important part is we now have that first step. It’s positive for confidence, and uncertainty has reduced a little (the same could be said for the US election). At the margin, this may help shore up hiring/nvestment intentions.
• Also notable on the global scene, our CBA colleagues now expect a stronger Australian economic recovery. The expected 2020 fall in GDP of 3.3% is forecast to followed by a rebound of 4.2% in 2021, and 3.8% in 2022.
• Finally, house prices. They rose at the fastest pace in 17 years in October according to last week’s REINZ data. Having initially lauded the housing boom for helping to rescue the recovery, it’s quickly become a headache for the RBNZ, regardless of whether it believes it’s responsible.  We think it will get worse. We’ve been calling for LVR restrictions to be returned and they now will be, in March. But we suspect this will slow rather than stall house price acceleration. House prices look set to easily eclipse the RBNZ’s latest forecast.