ANZ changes its call on OCR hikes

"While we are upgrading our estimate of how much work the OCR needs to do assuming all goes well, our view continues to be that the risk is high that something will happen to interrupt the hiking cycle before its completion," it says in its latest research report.

The ANZ says inflation will reach 5.8% in the March quarter next year and the Reserve Bank’s OCR could tip 2% by August and potentially go higher.

And ANZ chief economist Sharon Zollner also warned Tuesday’s “dramatic increase” in wholesale swap rates was so large there is real pressure for mortgage rates to rise further before long.

“This increases the chance housing market momentum could turn more sharply than forecast and flip more abruptly than expected from a support to a drag on household spending and construction activity.

“Many households are highly indebted after taking on massive mortgages during a year where house prices rose more than 30%, so even a small increase in interest rates will have a significant impact for those households,” says Zollner.

“And globally, a reassessment of the likely average cost of borrowing over the next few years poses a challenge to asset valuations that underpin household wealth.”

However, recent research by the RBNZ suggests the peak impact of any OCR hikes may not be felt for at least six months, as households roll off fixed mortgage rates.

Inflation pressures are everywhere in the economy right now, says Zollner. Building costs are skyrocketing, petrol prices are surging, supply chains are stretched, food prices have risen six months in a row and labour is in short supply.

“Price increases in essential items will hit poorer households the hardest,” she adds.

She says the bank feels confident in saying the country probably hasn’t seen the worst of inflation yet.

The bank is expecting the RBNZ to take every opportunity it gets to raise the OCR and is forecasting hikes in November, February, April, May and July.

Zollner says the OCR probably needs to go to around half a per cent above neutral, which the bank estimates to be around 1.5%.

“The RBNZ estimates neutral to be 2%, so we expect the November Monetary Policy Statement to show the OCR rising steadily to about 2.5% or a little higher.

“The fact a lot of inflation pressure currently is driven by supply-side factors doesn’t mean that raising interest rates won’t work to head it off.

“By reducing appetite to borrow and making indebted households more price sensitive, rate rises still throw sand into the gears of the inflation process by impeding the pass-through of costs.

“Lower demand means less inflation pressure than otherwise, regardless of the mix of demand and supply developments that kicked it off,” says Zollner. 

She says it is important to highlight that although the bank is raising its central OCR forecast, there is a significant risk that something could happen to derail the hiking cycle before its completion.

“These risks are intensifying, if anything.”

The market is, understandably, mulling over the chances of a 50bps hike at the next Monetary Policy Statement. “At that point, we’d expect a more consistent profile of hikes to be priced in, but that will do little to take pressure off one to three-year swap rates (and by extension, mortgage rates).

“The market has already delivered a lot of tightening.

“The Funding for Lending programme will ameliorate some pressure, but working in the other direction, the gap between banks’ deposit and lending growth is wide.”