ANZ still expects three OCR rises this year

ANZ economists don’t think so.

In the bank’s latest Property Focus, the economists say the RBNZ was already forecasting three hikes before the oil price spike occurred.

The starting point for the OCR is arguably the single most important factor motivating hikes over the next few months, Sharon Zollner, ANZ chief economist says. The OCR is at cycle lows.

Following a memorandum of understanding between Iran and the US, oil prices have, for now, fallen almost as abruptly and as far as they increased.

“The speed and extent of this correction has taken us – and the RBNZ – by surprise. However, the central bank was already forecasting three hikes before the oil price spike occurred.

Zollner says the debate since February has been about the timing of any OCR hike,

“On balance, we still expect the RBNZ to hike the OCR by 25bp next week and in September and October, taking the OCR back to 3%, the RBNZ’s current best estimate of neutral.

Other reasons why ANZ economists still expect hikes starting in July include the fact that the market is still expecting it, the asymmetric risks around the oil price from this starting point, and the improving growth outlook now that oil prices have eased.

“While we still expect the RBNZ to lift the cash rate next week, lower oil prices will take some of the heat out of inflation and buy the RBNZ more time.

“But it’s not the case that lower oil prices mean that the OCR doesn’t have to go higher, and how high it needs to go will depend on how quickly growth and confidence rebound.”

House prices will fall further

While predicting there will still be three OCR hikes this year, the bank is also forecasting a 2% drop in house prices this year. “Despite everything that’s been thrown at the economy over the past few months, house prices have stayed on a largely flat path,” Zollner says.

It is apparent buyers have stepped back to some extent since the start of the year, but many sellers have hit pause too, preventing significant downward pressure on prices.

Zollner says the bank’s forecast continues the long-running theme of going nowhere fast after the COVID era boom and bust.

“Our shift to outright house price falls this year is due to interest rates heading up, uncertainty around the taxation of housing heading into this year’s general election, and weaker growth from the oil shock.”

She says the first two of these factors are still in play, but if oil prices do stay down, there’s room for the economy and housing market to outperform ANZ’s expectations in the coming months.

The quandary continues

On the mortgage front, although there has been a slight rise in median mortgage rates in the six-month to two-year space over the past month, measures of median rates aren’t capturing recent mortgage rate cuts announced by some banks.

These cuts have come on the back of lower wholesale interest rates, which have fallen along with oil prices as the Middle East conflict has deescalated

While many homeowners will welcome the prospect of a pullback in mortgage rates, Zollner says the broad parameters of the quandary facing borrowers remain the same: fixing for longer gives more certainty, but costs more too, and vice versa.

“Given that financial markets are pricing in a higher OCR end point than we expect, and long rates are markedly higher than shorter ones, we see more value in fixing for one-two years.”

Given the range of mortgage rates encapsulates an expectation of progressively higher rates over time, Zollner says the question remains; is it worth paying more for time certainty?

“From a purely financial perspective, taking our forecasts as gospel, we’re more inclined to say “no”. That’s because the curve is steep and there’s a lot in the price already.”

For example, the median one-year rate would need to rise from its current level of 4.75% to 5.83% in a year’s time before back-to-back one-year fixes cost more than a single two-year term of 5.29%, which can be locked in now.

“We don’t expect on-year rates to rise by that much and the OCR would likely need to be nearer 4% than 3% for one-year mortgage rates to get closer to 6% rather than 5%,” Zollner says.

The reason why the two-year is already higher than the one-year is that markets are already bracing for hikes, so when they come, it won’t be a surprise.
However, uncertainty is high.