Are Kiwis set to head back over the ditch?

Back of business person walking with briefcase

Last week, something very significant happened for those of us around the planet wondering in the business of forecasting interest rates. The Reserve Bank in their regular Monetary Policy Statement published a set of forecasts for where they see interest rates going.

This may not sound like much, but the last time they did this was in February last year before we went into lockdown. Faced with the sharpest sudden hit to our economy ever seen they slashed interest rates and refrained from printing any numbers picking when they would start raising them again – until last week.

The Reserve Bank has pencilled in 1.5% worth of increases in floating interest rates starting just after the middle of next year and running through into 2024. Other central banks overseas continue to stress either that they have no thoughts regarding when rates will rise, or that they do not plan raising interest rates until 2024.

The danger of inflationary pressures

Inflationary risks are rising around the world and in many regards other economies face stronger upside risks to inflation than we do. Labour markets globally are tightening up far more quickly than had been expected. Australia’s unemployment rate has fallen for six months in a row to reach 5.5%. Our own rate is at 4.7% and employers across most sectors are reporting that they cannot find the staff they need.

Tough times ahead for Kiwi businesses

Things are bad for those running businesses at the moment. But they are set to get worse. Not only has the government stated that when the borders open up, they will not issue as many working visas as before, and the booming Australian jobs market is going to attract a lot of Kiwis to shift to Australia. Not only that, but the 650,000 Kiwis already over there are decreasingly likely to come back to New Zealand – even taking into account Victoria’s latest lockdown.

At some stage wages growth in New Zealand is going to pick up and that will force many businesses to raise their selling prices. In fact, in the ANZ’s monthly Business Outlook Survey a record net 57% of businesses have recently said they plan raising their prices.

These price rises will be driven not just by eventually rising wages, but increased costs of materials related to still substantial supply chain problems around the world.

For the moment most central banks are saying that the factors causing the likes of the United States annual inflation rate to hit 4.2% are temporary. But the longer it takes for supply chain problems to be resolved and for prices to go back down, the greater the chance that higher inflation expectations feed into pricing behaviour.

How will all of this impact mortgage interest rates?

The upshot is that the writing is on the wall for record low interest rates in New Zealand. Already we have seen one round of increases in fixed mortgage rates about 4-6 weeks ago. Another round is likely in the next two months with further increases as we head into mid-2022 when the Reserve Bank is likely to start raising its official cash rate from 0.25%.

For borrowers there is a growing incentive to recognise rising inflation risks and consider fixing debt for longer time periods than just one year, even if that means paying a bit more in the short-term.

Go to www.tonyalexander.nz to subscribe to my free weekly “Tony’s View” for easy-to-understand discussion of wider developments in the NZ economy, plus more on housing markets.

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