Economist says interest rate outlook has not changed despite Ukraine war

Thursday, 10 March 2022

Independent Economist Tony Alexander says mortgage lenders' willingness to lend has dropped.

The outlook for interest rates has not changed despite the war in Ukraine adding additional cost pressures, independent economist Tony Alexander says.

Some economists have revised up their expectations for interest rates because of the conflict.

ANZ predicted the OCR would double to 2 per cent by May and peak at 3.5 per cent in April next year.

Even with the war increasing the price of oil and other materials, Alexander did not think interest rates were likely to go any higher than they would have three weeks ago, before the invasion began.

That was because a number of factors were accumulating to suppress economic activity already – effectively reducing the need for the Reserve Bank to cool the economy via official cash rate (OCR) hikes.

**READ MORE:

Independent Economist Tony Alexander says one 50 basis point increase to the OCR is likely as the Reserve Bank sends a warning signal to the market.

* The housing boom is over, Westpac says

* House prices 'could fall 10 per cent' as result of official cash rate forecast, economist says

* What mortgage repayments will cost as rates rise

These included a recent survey that showed increasing numbers of consumers were planning to cut spending over the next three to six months, and a survey of real estate agents that reinforced house prices were already falling, meaning the Reserve Bank did not need to do as much to bring them back under control.

Alexander’s forecast remained that OCR increases would be slower and the peak lower, in part because the fallout from Ukraine was likely to have a cooling effect on the economy.

“The increase in oil prices acts as a tax on the economy, it will slow down the rate of growth in the economy, which is what the Reserve Bank wants from raising interest rates,” Alexander said.

“So there is already something like more restraint coming on the economy.”

ANZ’s OCR forecasts predict sharper rises and a higher peak compared to most other banks.

The OCR has a direct effect on interest rates – and particularly mortgage interest rates.

Alexander said the Reserve Bank’s remit allowed it to look through a one-off economic shock, such as the war in Ukraine, and the bank could not do anything about the inflation happening this year anyway, because it took 18 months for the effects of interest rate changes to filter through to affect inflation.

In 2023 though, Alexander expected supply chains to be functioning better, the impacts of Covid-19 receding, shipping to be cheaper, and the price of oil to have fallen to some degree.

Westpac acting chief economist Michael Gordon says the bank is sticking to its more conservative OCR forecasts.

“It’s this year we will see the inflation rate lift as a result of the spiking commodity prices - energy, mineral, food,” he said.

If he were to give the Reserve Bank advice, Alexander said it would be to look at his monthly spending plans survey, which showed consumer spending was already being crunched.

“The Reserve Bank raises the cash rate to crunch consumer spending - and my survey shows that crunch is already happening. The restraint they want is already appearing in the economy.”

Alexander’s monthly survey, which received 1202 responses and was conducted a week ago, showed a net 13 per cent of respondents planned to cut spending in the next three to six months.

The survey before showed a net 10 per cent planned to cut spending. This was a break from the norm, with every result since the survey started in 2020 having shown consumers feeling far more positive.

House sale volumes hit their lowest price post-GFC in January, suggesting a buyer-seller standoff on price.

Westpac is also predicting more modest interest rate increases and a lower peak.

Westpac acting chief economist Michael Gordon said the bank still predicted 25 basis point increases, reaching a peak of 3 per cent by the second-half of next year.

“We’re always open to reviewing the forecasts, but we haven’t made any change recently,” he said.

‘No reason to increase rates to lower house prices’

Alexander said his monthly survey of real estate agents, in partnership with the Real Estate Institute of New Zealand, showed increasing weakness in the real estate market.

“Fomo (fear of missing out) has gone from the economy, it’s a buyers market,” he said.

“There is zero reason for the Reserve Bank to raise interest rates to suppress house prices.”

While Alexander disagreed with ANZs prediction of two 50 basis point increases to the OCR, he did expect one of the next two reviews to lead to an increase 50 basis points.

That was a way of warding businesses off increasing the price of their products, and putting people off demanding larger wage increases, Alexander said.

”That’s what the Reserve Bank will be wanting to do.

“It would also be a warning to us as wage earners that maybe I shouldn’t go on strike for 10 per cent, maybe I’ll only go on strike for 5 per cent.”