ANZ now sees official cash rate doubling to 2% by May

Tuesday, 8 March 2022

The country’s biggest bank is forecasting that the Reserve Bank will abandon its previous policy of steady interest-rate rises and plump for a steep rise in the official cash rate in the face of bigger worries about inflation.

ANZ said it now expected the central bank to hike the OCR by 50 basis points both when it next reviewed monetary policy on April 13 and when it releases it next full monetary policy statement on May 25.

That would double the OCR from 1 per cent to 2 per cent.

ANZ is also now predicting that the OCR will peak at 3.5 per cent in April next year, rather than topping out at 3 per cent.

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Whether or not its forecasts hold true, the predictions could be expected to influence longer-term retail interest rates, including mortgage rates.

The banke xpectes house prices to fall 10 per cent over 2022, rather than the 7 per cent it had earlier forecast.

The bank revised its forecasts after concluding that inflation was likely to hit 7.4 per cent in the three months to the end of June, rather than topping out at 6.6 per cent in the current quarter as the Reserve Bank last predicted.

“The Reserve Bank would prefer to look through oil price shocks, but right now, with inflation expectations so high and rising, they just can’t.”

ANZ’s expectations have changed in the wake of Russian president Vladimir Putin’s war on Ukraine, which has seen the price of key commodities including oil, wheat, coal and aluminium soar.

The bank is tipping higher interest rates despite what it described as “clearly mounting downside growth risks, both in New Zealand and globally” and a new expectation that house prices will fall 10 per cent this year.

Events had moved fast since the Reserve Bank last raised the OCR by 25 basis points last month, it said.

ANZ said there seemed to be little hope of what it described as ‘the Ukraine situation’ being resolved quickly “and we do know sharply increasing fuel prices will be particularly visible”.

“Analysis shows that petrol prices have a much bigger impact on household inflation expectations than their weight in the consumer price index alone would suggest,” it said.

“Given the extreme tightness in the labour market, rising inflation expectations could then feed into a wage-price spiral.”