Wealth, the OCR and migration

The value of houses at $1.57 trillion trounces the NZ Super Fund and Kiwisaver at $154 billion, listed shares at $169 billion and commercial real estate at $313 billion.

Kiwis live in 1.68 million houses, and those homes make up 43% of total household assets, rising 4% since 2018.

Outstanding mortgage debt of $347 billion is held against residential property and about half of that is due to roll on to higher interest rates this year and early next year.

CoreLogic says this will require significant adjustment to those households’ finances. In terms of new lending flows, however, loans at high multiples of debt have fallen to low levels.

Chief property economist Kelvin Davidson says mortgage interest rates are now close to, or already at, their peak and they are unlikely to fall much over the next nine to 12 months.

The question on everyone's lips is whether the Reserve Bank (RBNZ) will give any indication of whether it will this week lift the Official Cash Rate (OCR) above its stated ceiling of 5.5% - the  highest level since 2008 - to bring inflation under control.

Wednesday’s review of the OCR will come with the latest Monetary Policy Statement, in which the RBNZ outlines its latest thinking. Economists are expecting it will give some sense of how the fight against inflation is faring and where it believes the OCR will come to rest. Westpac is forecasting a rise to 6% and ANZ and ASB 5.75%.

ASB chief economist Nick Tuffley says the Monetary Policy Statement now looks more on a knife edge. Post-Budget ASB is expecting a 50bp lift in a couple of days.

“We think that will be it, but the RBNZ will flag the risk of a further hike.”

Tuffley says while there is an evident turning in inflation pressure and lagged monetary policy impacts that are yet to come through, there are two added flies in the inflation ointment: fiscal pressures and the uncertain impact of migration.

He says last week’s Budget opened up the fiscal taps more than the bank had expected and is set to be quite stimulatory at a time when the RBNZ is still trying to lean against inflation.

The future path of the OCR will depend on how migration-flows evolve and RBNZ assumption on how they will influence inflation.

Tuffley says the orthodox thinking on migration is that it adds to inflation pressure. “We aren’t as convinced that will be the case this time, particularly as labour shortages have played a significant role in boosting recent inflation pressures,” says Tuffley.

“But right now, it’s the RBNZ’s take that matters. The MPS is likely to be clear that high interest rates will need to be sustained for some time yet.”