Falling home loan rates likely to irk RBNZ

Recent falls in the amount of money that people actually pay on their loans have proved irksome to the Reserve Bank (RBNZ), according to the ANZ chief economist Sharon Zollner.

Their net effect will be to prod the RBNZ into being more resolute than ever in pushing up the Official Cash Rate (OCR).

This is almost universally expected to rise by 50 basis points when the RBNZ issues its Monetary Policy Statement on Wednesday.

This decision will be followed by further rises.

According to Zollner, people getting slightly cheaper loans at a time when the RBNZ is pushing the other way will bear some of the blame.

Making this worse is the fact that these rate cuts have been funded by liquidity in the United States, not by local conditions.

The cuts in some interest rates have been made recently by all the main banks.

For example, Kiwibank announced small cuts to standard and special fixed rates for three, four and five year mortgages. The big four banks have made similar moves.

Zollner says the RBNZ does not like this at all.

“We don't think they will be very happy that the market is pricing in cuts next year, nor that mortgage rates are going down,” she said.

“It is all led out of the US market, which decided that the Federal Reserve is going to be softening (base rate) hiking soon and then cutting, and nothing the Fed officials are able to say is having much impact on that.”

As a result, lower long-term rates in the US are spilling over into New Zealand.

Zollner says the RBNZ is unhappy and has a clear message for lenders here: “We are not done with hiking and please don't price in imminent cuts in retail rates.”

Westpac Senior Economist Satish Ranchhod does not go quite as far as Zollner but still sees a dilemma for the RBNZ.

“A lot of mortgage rates are priced off developments abroad and we have seen growing concern about the global economy …. but here in New Zealand we are expecting to see the Reserve Bank continuing to hike the cash rate for some time.

“It will be a balancing act for them, between those pressures which are coming from abroad and bubbling inflation pressures that we are seeing domestically.”

Meanwhile, Zollner has a new high point for the OCR – 4.5% before it levels off.

This is higher than other banks' already hawkish 4%, including her own.

But she says the 4.5% figure is an analysis of what the RBNZ is likely to say when it makes its Monetary Policy Statement on Wednesday, based on what has happened in the market since it last spoke publicly.

“We are forecasting the forecast,” she said.

“It might seem like a strange thing to do but their forecast has a huge impact on the market.

“The Reserve Bank was already at a 4% (endpoint) in May and since then we have had upsides on domestic inflation, core inflation and wages.”

As a result, she argues, the Bank's own endpoint is likely to have risen 50 points higher than it was back in May.