RBNZ Survey: Brace For Rate Rise As Experts Agree Hike Imminent

News highlights:
2 in 3 experts predict a cash rate hold in May
71% think ‘bread and butter’ support package is enough to keep up with rising cost of living 
Property prices tipped to fall 23% by end of the year, from peak of 2021

3 April 2023, New Zealand – Kiwi homeowners are in for little relief with yet another rate hike expected this month, according to a new Finder poll.

In this month’s Finder RBNZ Official Cash Rate Survey, 9 experts and economists weighed in on future official cash rate (OCR) moves and other issues relating to the state of New Zealand’s economy.

All panellists (100%, 9/9) are predicting the OCR will rise again this coming Wednesday.

The majority of experts (89%, 8/9) believe it will increase by 25 bps – bringing the cash rate to 5% in April – the highest it’s been since December 2008.

Three quarters of those who weighed in* (75%, 6/8) think the cash rate will peak on average at 5.5% by May 2023.

Two-thirds of Finder’s panel (67%, 6/9) predict the RBNZ will hold the cash rate in May.

Angus Kidman, Finder’s editor at large in New Zealand, said another rate rise was imminent.

“Another rate rise will be a massive burden for millions of households who are already grappling with serious cost of living pressures,” Kidman said.

Kidman urged borrowers to assess their mortgage debt as more rises were on the cards.

“Borrowers aren’t accustomed to these higher repayment amounts and each increase will be causing extra pain.

“High interest rates won’t last forever but mortgage holders need to ensure they are getting the best rate possible on their home loan,” Kidman said.

Panel members cited persistently high inflation as the main reason for their predictions.

Sharon Zollne from ANZ said for now, global banking wobbles remain far from New Zealand shores.

“It is a very uncertain environment, and if things change, the RBNZ will adapt quickly. But here and now, it still appears the RBNZ have more work to do to get on top of inflation,” Zolline said.

Kelvin Davidson from CoreLogic agreed.

"Inflation is still a concern and the RBNZ has signalled a continued desire to really get on top of it,” Davidson said.

Panel supportive of the government’s boost to benefits

From April 1, the government has announced a ‘bread and butter’ support package to help 1.4 million New Zealanders battle the rising cost of living.

The package will increase superannuation benefits, pensions, and student allowances by 7% to keep up with inflation.

An overwhelming majority of those who weighed in* (71%, 5/7) believe these changes are enough to help with the rise in cost of living.

Angus Kidman said the package will come as a relief for a lot of Kiwis struggling to cope with rising costs.

“Those on lower incomes rely on these benefits to survive,” Kidman said.

Panellists cited the inflationary effect on chipping away at the social safety net made these changes effective, but pointed out that it may not be enough to keep up with food and rent prices.

Alfred Guender from the University of Canterbury said inflation gnaws at the social consensus and at the safety net for people on low income.

Mark Holmes from the University of Waikato noted the payments might not be enough to keep up with food prices and rent.

When asked what other policy changes the government should consider, panellists cited lowering barriers to foreign direct investment, and adjusting tax brackets to avoid bracket creep.

Dr Oliver Hartwich from The New Zealand Initiative encouraged the government to open product and services markets to competition.

“Get rid of barriers to entry such as foreign direct investment rules,” Hartwich said.

Despite expected price drops, 39% of Kiwis think now is a good time to buy

The median home price fell 13.3% throughout New Zealand in January 2023 year-on-year to $762,500.

The panel forecast an average 23% fall in home prices from peak to trough by the end of 2023.

While the housing market dip might be worrying for some, Finder research shows 39% of Kiwis think now is a good time to put money in the property market.

Angus Kidman said property is still a very attractive investment class for New Zealanders – falling house prices might help some get their foot on the property ladder.

Panellists noted that previously inflated home prices were leading to a major correction.

Donal Curtin from Economics New Zealand Ltd said previous excessively high prices were an artefact of unusually low interest rates and to some degree a momentum driven element of 'fear of missing out'.

“Both factors have now turned sharply in the opposite direction," Curtin said.

Dr Oliver Hartwich from The New Zealand Initiative said the RBNZ's policies have artificially inflated house prices to ridiculous levels.

“The necessary correction will be of a similar magnitude,” Hartwich said.

Kidman said rising interest rates were making it more expensive for homeowners to service a mortgage, and more difficult for investors to turn a profit on rental properties.

“This has a natural dampening effect on the price people are willing to pay for a home.

“Unless you’re planning to sell your home, you don’t need to pay much attention to falling property prices. In the long run, property is still an excellent way to accumulate wealth.

“If you are looking to buy, the next 6 to 12 months could be a good opportunity to score a better deal on your dream home – as long as you can afford your home loan repayments as rates rise,” Kidman said.

Positive economic sentiment drops

Finder’s Economic Sentiment Tracker gauges experts’ confidence in 5 key indicators: housing affordability, employment, wage growth, cost of living and household debt over the next 6 months.

Positivity towards all indicators – with the exception of housing affordability – dropped in April.

Positivity towards cost of living, household debt and employment all fell from 8% in February to 0% in April.

*Experts are not required to answer every question in the survey

Here’s what our experts had to say:

Alfred Guender, University of Canterbury (Increase): "RBNZ must tread carefully to attain both its price stability and financial stability objectives. Reining in inflation remains a problem. So further tightening is required. However, further 50 or 75 point increases in the OCR could put enormous pressure on borrowers to meet their obligations, jeopardise financial stability and would surely tip the economy into a recession. A moderate 25 point increase signals that RBNZ continues its tightening stance to bring inflation down without rattling financial markets."

Donal Curtin, Economics New Zealand Ltd (Increase): "Still facing an unacceptably high inflation outlook."

Sharon Zollner, ANZ (Increase): "For now, global banking wobbles remain far from NZ shores. It is a very uncertain environment, and if things change, the RBNZ will adapt quickly. But here and now, it still appears the RBNZ have more work to do to get on top of inflation."

Mark Holmes, University of Waikato (Increase): "The latest GDP data points to a slowing down of economic activity with the prospect of the NZ economy officially going into recession later this year. While the recent quarterly inflation data has pointed to some easing of non-tradeable price pressure, inflation remains stubbornly above the Reserve Bank target. There are added price pressures to factor in from Cyclone Gabrielle and the subsequent recovery from that. Note might also be taken of uncertainties related to the ongoing overseas banking turmoil. With all this in mind, a more modest 25 basis points increase is likely on this occasion."

Dr Oliver Hartwich, The New Zealand Initiative (Increase): "According to GDPLive.net, there is no sign of inflation coming down. It seems to have stabilised at above 7 percent right now. At the same time, GDPLive.net also shows economic growth running at an annualised rate of around 3 percent. In other words, despite previous OCR increases, there are still signs of an overheated economy. The RBNZ has made it clear that it wants to cool down the economy and get inflation under control, and the only chance they have to achieve that is with another OCR increase. And even then, there will still be a massive gap between the OCR and where the OCR would be under the Taylor Rule. Thankfully, GDPLive.net calculates this too - and the gap between actual OCR and Taylor Rule now stands at above 4 percentage points. In summary, we are a long way from where we ought to be to get inflation back under control. Those who think inflation is temporary and minor OCR adjustments will do the trick are most likely too optimistic."

Michael Gordon, Westpac (Increase): "Interest rates will need to stay high for some time to bring inflation pressures into check. But with the economy not running as hot as the RBNZ expected, the required peak in rates is probably closer than thought."

Jarrod Kerr, Kiwibank (Increase): "The rapid rise in interest rates is impacting households and SME businesses. And the rapid rate rises come at a time of high inflation pressures reducing purchasing power. The wealth effect is also dampening confidence and demand as property prices fall ~20-to-25%.we will see a peak in interest rates in coming months, and rate cuts are likely before year end."

Kelvin Davidson, CoreLogic (Increase): "Inflation is still a concern and the RBNZ has signalled a continued desire to really get on top of it."

Michael Reddell, Croaking Cassandra economic commentary blog (Increase): "The peak must be near (given both domestic and foreign indicators) and it is questionable whether even an April increase is warranted, but it will take a while to be confident core inflation is heading securely back to 2%, and central banks aren't usually quick to reverse policy direction."

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