Director’s Opinion, James Nell
The Reserve Bank (RBNZ) delivered its last Monetary Policy Statement in late November. On the back of the surprise inflation results for the previous quarter, the Official Cash Rate (OCR) was increased 0.75% to 4.25%.
The RBNZ forecasts another two quarters of high inflation numbers peaking at 7.5% and have set their forecast for the Official Cash Rate (OCR) on this basis. They expect the OCR to peak at 5.5%, which is about 0.4% ahead of where interest rate markets had been expecting prior to the announcement and significantly higher than the RBNZ’s August statement as shown in the graph below. They forecast the OCR staying at this rate before starting to reduce from mid-2024. The RBNZ have stated that they “remain resolute in achieving the Monetary Policy Remit” which is annual inflation between 1% & 3%.
RBNZ intends to hit inflation hard and do their best to dampen consumer demand with rapid interest rate increases and have stated that they are prepared to put the economy into recession if required. The RBNZ also wants businesses and employers to play their part by moderating price increases and employee wage demands. This can be difficult when margins are squeezed by higher input costs and there is a tight labour market.
This begs the question of what borrowers can do to manage their exposure to higher interest rates at this point in the cycle? They answer is unfortunately not much, other than bracing the business for an expected 18 months of interest rates 1% – 1.5% higher than they are currently paying.
While the ideal time to fix was probably Q2 2021, there may still be merit in fixing for a period to take the top out of the interest rate increases. However, there is a risk of locking in current high rates past the time easing is expected. Based on current projections, this would favour fixing in the one to two year range but forecasts are just that; actual results will vary! The key is to make sure the average rate your business is paying is manageable from a cashflow perspective.
Borrowers also need to be wary that RBNZ is in the business of perpetuating a doomsday narrative. The more they can scare consumers and business into reducing spending, the less damage they have to do to the economy by increasing rates. There is also a high chance that RBNZ will overshoot the mark with rate increases as the OCR is a blunt tool.
Arguably the best thing borrowers can do is to keep well informed about what factors are influencing rates and current economic conditions so they can make informed choices.
