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Economic Weekly: Aftermathematics

Last week’s RBNZ meeting wasn’t quite the drab affair most anticipated. It wasn’t that the RBNZ materially changed its economic view of the world. It was more that it felt the downside risks surrounding the outlook had sufficiently receded to both (a) drop its easing bias, and (b) display a forecast interest rate track that had the Official Cash Rate rising 150bps, from 0.25% in mid-2022 to 1.75% in mid-2024.

It’s important to remember that the RBNZ’s published interest rate forecast is not a promise to follow through. All of the Bank’s forecasts are conditional. They can be quickly shelved if things don’t turn out as planned. And let’s not forget there have been plenty of cases, even in the past five years, where best laid plans have had to be changed. Twelve months is a long time in the post-COVID era.

Still, in the here and now, the outlook continues to improve. We’d been mulling the risk our prior view of an August 2022 start to the RBNZ tightening cycle might have to be brought forward. And the clear intent and signalling of the RBNZ last week was catalyst enough for us to do so, and we shifted our forecast for the first 25bps rate rise to May (full write-up here).

Supporting our new stance is the fact that we already see things turning out a bit stronger than the RBNZ’s (updated) forecasts. Importantly, we don’t share the RBNZ’s view that the coming inflation spike will be largely transitory (see chart). And we also believe the Bank could be surprised by the strength of the labour market. We expect the unemployment rate to fall to 4% by the end of 2022. The Bank has 4.6%. Recent employment partials have, if anything, come in on the stronger side of our expectations.

So, what are the implications of all this? Here’s our quick take on the aftermathematics:

·         Higher wholesale interest rates. We’ve nudged up our swap forecasts by 10-30bps. See our forecast tables.

·         Related to this, we’re now more convinced we’re past the lows in mortgage rates. Our forecasts suggest some modest upward pressure on all but the near-term mortgage rates over the rest of the year.

·         This supports our view the pace of house price increases will slow down over the second half of the year.

There’s more upside for the NZ dollar. Admittedly, our constructive NZD view is mostly linked to the global reflation trade and higher NZ commodity prices. But the fact the RBNZ is comfortable being perceived as one of the first central banks likely to lift rates (joining the Bank of England and Bank of Canada) will add to NZD demand.

mike.jones@asb.co.nz

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Jane Turner

Senior Economist

Originally hailing from sunny Nelson, Jane moved to Auckland to join the ASB team in 2008.  As Senior Economist, Jane's main focus is co-ordinating the team’s macro-economic forecasts.  In this key role, Jane was thrilled by the team’s twice consecutive win of the Consensus Economics Forecast Accuracy award.   

During her decade-long career in economic forecasting, Jane has gained a thorough knowledge of the New Zealand economy.  Her current focus is on New Zealand GDP growth, including both manufacturing and the construction sectors.  She has spent time forecasting most sectors of the economy, including inflation, trade, housing, labour and financial markets.

Prior to joining ASB, Jane honed her macro-economic forecasting skills at the Reserve Bank of New Zealand.  Jane is a qualified scarfie, attending Otago University and graduating with a Bachelor of Commerce in Economics with 1st class honours.  In 2014, she took a career break from ASB to travel the world and learn to snowboard.

Mark Smith

Senior Economist

Mark joined ASB in 2017, with over 20 years of public and private sector experience working as an economist in New Zealand and the UK.

His resume includes lengthy stints at ANZ and the Reserve Bank of New Zealand, and he has also worked at the Bank of England, HM Treasury and the New Zealand Transport Agency. Mark's areas of specialisation include interest rate strategy, macro-economic analysis and urban economics.

Born and bred in the Waikato, Mark studied at Waikato University where he graduated with a Master of Social Sciences, majoring in Economics.

Mark's key strengths are the ability to use his extensive experience, inquisitive nature, analytical ability, creativity and pragmatism to dig a little deeper and to deliver common sense solutions to tackle complex problems.

When not at work Mark likes to travel, keep fit and spend time with his friends and family.

Mike Jones

Senior Economist

Mike joined ASB in 2019 armed with almost 15 years of experience in applied macroeconomic and financial markets analysis.

Mike's career has been all about distilling the risks and opportunities of economic and financial market trends for business. Basically asking the "what does it all mean" question. Mike's enthusiasm and skill for drawing out practical, commercial insights from the murky world of economics has been honed over a relatively broad base of experience.

After spending the early part of his career on the tools at the Reserve Banks of both NZ and Australia, Mike had a lengthy stint at BNZ where he was NZ’s top-ranked currency strategist. His regular and topical macro research also saw him pick up several FX forecast accuracy gongs from Bloomberg.

Drawn in by the prospect of putting strategy into practice, Mike moved from Wellington to Auckland in 2013 to join Fonterra as GM Treasury Risk Management. In this role, Mike lead Fonterra’s macroeconomic research output, and was responsible for the strategy and execution of Fonterra’s foreign exchange, debt, and interest rate hedging programmes.

mike.jones@asb.co.nz