Westpac’s economics team now believes the Reserve Bank of New Zealand will need to lift the Official Cash Rate (OCR) to as high as 6% – a new high projection among big bank economists.
The OCR is currently sitting at 5.25%, and most economists expect another 0.25% increase at the review next week, bringing the OCR to 5.50%.
However, in Westpac NZ’s latest economic summary, chief economist Kelly Eckhold warns that returning inflation to sustainable levels [it is currently 6.7%] will be difficult, and that additional tightening is needed to achieve this goal within a reasonable timescale.
Westpac’s forecast would see the effective mortgage rate – defined as the average interest rate borrowers are paying on all outstanding mortgages – up to around 6%, which is nearly double its low in April 2022 (3.2%):
Westpac estimates that “around 50% of all fixed rate mortgages will come up for repricing over the year ahead, and the average mortgage rate is set to rise by a further 150 bps by early 2024”.
“That will see the average household’s spending on interest costs increasing from around 5% of their disposable income in 2022 to 10% in 2024, and some borrowers will face much larger increases”.
“Higher interest rates along with rising living costs will drain a large amount of cash out of households’ wallets. That means many households will be forced to wind back their spending over the coming year”.
While the increasing pressure on households’ finances will be a significant drag on economic activity, Westpac warns that the “rapid turnaround in net migration and population growth” will help to provide a floor under economic growth:
In turn, “a trough in the housing market is approaching faster than previously anticipated”:
Westpac also warns that “population growth is set to outpace home building by a sizeable margin”, meaning housing shortages:
“With population growth boosting demand across a range of sectors”, Westpac warns that “inflation pressures in areas like the retail sector are likely to be stronger than would have otherwise been the case”.
However, high immigration will also “help to alleviate the shortages of skilled labour that many businesses have been struggling with, as well as the related upward pressure on wage rates”.
“As a result, while higher migration will add to inflation in the near term, the impact on longer term inflation pressures will be much more limited due to the related lift in the economy’s productive capacity”.
Westpac’s hawkish interest rate projections come as new Roy Morgan research shows that New Zealanders are increasingly worried about rate rises:
“Roy Morgan’s latest data into how New Zealanders feel about interest rates reveals over half of people in New Zealand (54.1%) now say they are ‘worried about interest rates at the moment’ – up from 34.6% in June 2021 – an increase of almost 20% points in only 18 months”, CEO Michelle Levine said.
“Now nearly two-thirds of New Zealanders who are paying off their home, 63.3%, say they are ‘worried about interest rates at the moment’ – up from a low of only 21.6% in March 2021″.
“This is an increase of over 40% points in a year-and-a-half – and the RBNZ has raised interest rates even further since the end of last year”.
The Reserve Bank of New Zealand has lifted rates more aggressively than nearly every other central bank. And bit looks like there is more pain to come.
