ANZ: 7% OCR a possibility

Tuesday, 20 February 2024

ANZ says the balance of risks would indicate that the OCR should be higher than it is now.

It’s not impossible to imagine a scenario where the official cash rate (OCR) gets to 7% - or even the last peak of 8.25%, ANZ economists say.

In its latest Property Focus report, the bank’s economists said prospective homeowners should consider whether they could service a mortgage two or three percentage points above current rates.

ANZ previously expected the OCR to drop from August but now expects two more hikes this year - although it said that should enable the Reserve Bank to decisively get on top of inflation, and for interest rates to fall next year.

“While these OCR increases will be painful for some households, especially those who took out large mortgages at low interest rates at the peak of the 2021 housing boom, the average household will still pay much less in interest costs as a proportion of their income than they did in 2007, when the OCR increased to 8.25% in order to contain inflation.

“We don’t think the OCR will reach those lofty peaks this time around but we certainly wouldn’t rule it out, either.”

The bank’s Quarterly Economic Outlook highlighted a scenario in which the OCR could get to 7%, without any geopolitical or oil shock.

What does the official cash rate mean?

Senior economist Miles Workman said that scenario reflected a state of the world in which monetary policy was having less impact than expected.

“In this scenario, rapid wage growth combined with robust employment means household income growth is a larger offset to an increasing debt servicing burden. Aggregate demand doesn’t slow enough to tame sticky domestic inflation with the OCR at 6%, so the Reserve Bank is forced to return to the hiking table.”

He pointed out the bank also outlined a scenario where the OCR dropped to 2% by the middle of next year.

“A scenario where monetary tightening is more potent than we and the Reserve Bank have calibrated for. The moral of the story is that forecasters, including the Reserve Bank are required to make a bunch of judgements about current and future inflationary dynamics, and you can throw all the analysis you have at gauging this stuff and still be proven wrong.”

He said, if the Reserve Bank wanted to balance the risks between an unnecessarily hard economic landing and still bringing inflation into line within a reasonable timeframe, the OCR should be a bit higher than it currently is.

“It’s also worth noting that if hikes are indeed needed, the longer the Reserve Bank waits to deliver them, the higher the OCR may eventually need to go. That is, delaying gives more oxygen to wage and price setting behaviour, meaning higher for longer CPI and therefore higher for longer interest rates.”

ANZ’s economists said the higher OCR prediction meant house price falls were “back on the table”. “At this stage it’s a risk only because the house price index remains robust in the face of a deteriorating outlook. We still expect house prices to go broadly sideways over the first half of this year but the picture is looking a lot less certain than it was at the end of last year.”

They said the forecast of hikes might make people wonder how long they should fix their mortgages for.

A term of 12 to 18 months should offer some protection through the last act of the Reserve Bank’s battle against inflation, they said. “Longer terms like two or three years are cheaper and may suit borrowers looking to stagger their fixed terms but they may expire after rates start falling again.”

They said a one-year rate still looked like a good option. “That’s because we think a higher OCR now will see inflation return to target sooner and head off the risk of inflation remaining entrenched.”