RBNZ reveals OCR level estimates
Now that the Reserve Bank of New Zealand (RBNZ) has announced its official cash rate (OCR) decision, economists are back to forecasting OCR changes – with Kiwibank economists noting a risk of three interest rate hikes next year, which could increase the OCR to 1% by the end of 2022.
In its latest Monetary Policy Statement, the RBNZ kept the OCR at 0.25%, and the Large Scale Asset Purchase and Funding for Lending programs unchanged.
“The Monetary Policy Committee (MPC) agreed to maintain the current stimulatory level of monetary settings in order to meet its consumer price inflation and employment objectives,” the RBNZ said in a statement.
The central bank also revealed its estimates of future OCR levels, including an increase to 1.75% by mid-2024 – shocking many economists and experts.
Kiwibank economists stated that financial markets were already sensitive to anything deemed hawkish, but the latest OCR decision fuelled the fire in the financial markets.
“The Kiwi dollar and wholesale interest rates were propelled higher. We see further upward pressure in coming months,” Kiwibank economists said, as reported by Interest.co.nz.
“As we noted last week, 80% of the collective mortgage book across the industry will have the opportunity to refix in the coming six to 12 months. That’s a huge chunk of refixing as we head into a tightening cycle. We may see a self-fulfilling pop in wholesale interest rates as banks cover refixing flows.”
The RBNZ’s OCR forecasts suggested that its first hike of interest rates would most likely come in the second half of 2022, with the industry anticipating the first increase in May 2022, according to Kiwibank.
“Of course, a move in May means a follow-up move in August and introduces the risk of three hikes to 1% next year,” the Kiwibank economists added.
“That’s the risk we believe is more likely to take the market from here. And we’d expect to see all interest rates rising in response.”
The Kiwibank economists reminded the industry that the RBNZ’s ‘OCR track’ is not set on stone, “but that means there’s potential for rate hikes to come sooner rather than later.”
“The expected timing around rate hikes will be influenced by how the market interprets economic data and COVID developments over the coming months. If the data surprises on the upside, expectations of rate hikes will naturally be brought forward. In the same way, downside data surprises or future community outbreaks may extend the current OCR on-hold stance,” they added.
