The Reserve Bank of New Zealand has been one of the world’s most aggressive central banks, hiking its official cash rate (OCR) by 5.0% since October 2021:
Economists expect the Reserve Bank to hike a 10th consecutive time at Wednesday’s monetary policy meeting, which would lift the OCR to 5.50% – the highest rate since December 2008.
The CEO of one of New Zealand’s largest mortgage brokers, David Cunningham, has written an open letter to Reserve Bank Governor Adrian Orr, pleading with him to keep rates on hold.
“No matter how I look at it, my sense is that raising the OCR further is the last thing the Reserve Bank should do right now”, Cunningham writes.
“The surge in ‘pent up’ migration to New Zealand is forecast to hit 100,000 net arrivals in 2023, before levelling out to around 50,000 per year post-surge”.
“Migration is actually the best possible inflation-fighting tool”, argues Cunningham.
“Bringing the tens of thousands of workers to fill vacancies businesses so desperately need filled, and helping to take the heat out of wage pressure”.
“The surge in migrants will see unemployment rise… as a result of a bigger labour supply, which will be a drag on inflation”.
Cunningham also argues that average mortgage rates will rise as huge volumes of fixed rate mortgages expire.
“The average mortgage rate Kiwi are paying today is 4.40%”.
“Now, even if the OCR is held at current levels, the average mortgage rate Kiwi are paying is going to rise to 5.90% over the next year, as more people roll off lower fixed mortgage rates to higher levels”.
“That’s another 1.50% to find on top of where we are now, and with repayment buffers much narrower”.
“Households are in for a world of pain”, Cunningham warns.
“Monetary policy is on a steep tightening cycle for another year. Kiwi don’t need the screws tightened further via more interest rates hikes. They need someone to cut them a break”.
Cunningham also argues that inflation expectations are falling and that the “no frills” federal budget was not expansionary.
Therefore, “patience is what’s needed here”, not further tightening.
“Governor Orr: Don’t kill the economy, and inflict even more pain on top of what’s already coming for Kiwi households, just to slay the dragon that little bit faster”, Cunningham concludes.
I largely agree with Cunningham’s view, especially as it pertains to the fixed rate mortgage reset’s impact on average mortgage rates.
However, I don’t believe it will matter.
The Reserve Bank is set to lift rates higher and will drive the economy into recession.
