Reserve Bank 'won't win friends' with OCR hike but there's some good news for borrowers

Tuesday, 21 February 2023

Chris Hipkins and Grant Robertson announce the first economic support package after Cyclone Gabrielle.

Economists say the Reserve Bank is likely to increase the official cash rate on Wednesday, even though many households and businesses are struggling with the impact of Cyclone Gabrielle.

The Reserve Bank has been hiking the rate in the face of high inflation. It is expected to peak at 5% or just above, from its current 4.25%, although commentators expect it not to hit the 5.5% originally forecast.

Most expect the rate to lift 50 basis points this time, to 4.75%.

But some say the central bank should pause.

* Kiwibank lifts deposit rates, but positive 'real' returns unlikely before 2023

Jarrod Kerr, chief economist at Kiwibank, said the decision to increase again could be postponed until the next meeting in April.

“Wholesale interest rates would decline, and lending rates would soften. Temporary relief, of all kinds, is needed in the time of crisis. The forward guidance from the Reserve Bank could point to a resumption of rate hikes from April, if required.”

He said that would highlight that officials understood the damage that had been inflicted by the storm.

“There is significant damage to key infrastructure, buildings and housing. And there will be severe damage to crops and farms. Guesstimates of the total economic impact are now in the billions, not millions.”

He said, while the rebuild phase would be inflationary, with an already-stretched construction industry and shortages of materials, the Reserve Bank should look through that.

“That’s what we think the Reserve Bank should do. What we expect the Reserve Bank will do, however, is deliver a 25bp or 50bp hike.”

The storm is likely to push up the price of food due to crop damage and rents as people have to move to new accommodation.

Adrian Orr has a tricky balance to negotiate, Chris Tennent-Brown says.

But he said indications that global inflation had peaked would be reassuring to the central banks.

“We expect inflation to be back near the top of Reserve Bank’s target band of 3% by the end of this year. And we see inflation stabilising near 2% later in 2024.”

ASB senior economist Chris Tennent-Brown said it was a case of “damned if you do and damned if you don’t” for the Reserve Bank.

“People will say ‘how on earth can they be hiking rates when people are struggling’. On the other hand, in a year’s time if the inflation beast isn’t back in its bottle, they’ll be criticised for not doing their job, which is to maintain price stability.”

But he said the Reserve Bank was now in a “fine-tuning” part of the cycle where increases were likely to be smaller. “A slower pace of tightening from now makes sense. It’s a really, really tricky tradeoff. It won't win them any friends, hiking in the face of disaster, but they’ve got to do it.”

He said it might be up to other parts of the financial system to deliver help to those who needed it. The Government has signalled support and the banks are offering facilities such as interest-free overdrafts.

Miles Workman, a senior economist at ANZ, said the Reserve Bank’s monetary policy was not well-placed to respond to localised events.

“It would be inappropriate to stimulate the whole economy, making labour even more scarce, when the regions hit hardest by the cyclone will need workers for the rebuild. “While hiking the OCR this week might appear counterintuitive or at least insensitive given it's so close to this heart-breaking event, doing so will help free up economic resource for the eventual rebuild. Fiscal policy, on the other hand, can be very targeted, so is in the best position to respond. “

What does it mean for home loan rates?

The big banks were all offering one-year to three-year rates on Tuesday around 6.5% to 6.7%, compared to the 2.5% that was common in late 2021.

But Tennent-Brown said he did not expect to see them move much further.

He said it would take a really strong statement from the Reserve Bank about the likelihood of future increases to drive any increase.

Wholesale rates had been volatile lately and there was upward pressure on the market, he said, after a period where it had come off slightly. But he said it was likely that rates would continue to move around in their current range.

A recent Stuff NowNext survey found that a third of property owners had experienced a mortgage rate increase already and most had seen their repayments increased by more than 10%.

Eight per cent had their mortgage repayments more than double and 46% said they had lifted by between 11% to 50%.

One in six said they couldn’t afford any further increases to their repayments. A third were due to refix this year, a figure that rose to half among those aged 25 to 44.

“I don’t see anything coming out of this meeting that would make us press to a new higher level of mortgage rates,” Tennent-Brown said.