Big changes to interest rate forecasts

Don't expect to see the Reserve Bank increase the official cash rate this week. However, economists are making significant changes to when they expect the RBNZ will make its next increase and how high it will take the cash rate in this cycle.

Monday, October 27th 2014, 4:00PM

The mortgagerates.co.nz survey of economists shows that no one is expecting the Reserve Bank to increase its OCR any time soon, and after last week's CPI announcement many economists are reviewing their forecasts and pushing out the date of the next increase.

At the time of the previous OCR announcement six weeks ago the general view is that the OCR would stay at its current rate of 3.50% until March next year. This forecast is changing.

Nine of the respondents are now saying the next increase is possible in September next year however others have indicated that they may revise their forecasts and push the next increase out to 2016.

The Reserve Bank moved early with its monetary policy tightening and delivered a quick 100 basis point increase in four consecutive increases of 25 basis points since March. Some economists say the central bank may, in retrospect, have moved too far too early and if it had its time again would not have delivered the 100 basis point rise.

Last week's CPI number, which recorded inflation at 1%, has been a key catalyst to interest rate forecasts.

"Looking back to the RBNZ's March official statement, which was when the RBNZ began to lift rates, the central bank expected CPI inflation to be at +1.9% year-on-year by Q3," HSBC chief economist Paul Bloxham says. "The stubbornly high NZD has played a part in lower than expected inflation, as has an environment of low global inflation. The domestic economy has also shown more spare capacity than was anticipated, partly reflecting strong inward migration."

"The benign inflation numbers give the RBNZ room to remain on hold for some time yet and for longer than we previously expected."

The other big change in forecasts is that economists are reducing the peak OCR rate in this cycle.

"We removed two of our predicted rate rises from 2015 and reduced the forecast peak from 5.25% to 4.50%," Informetrics chief forecaster Gareth Kiernan says. "Following (last week's) CPI data, we have pushed out the timing of the next rate rise from March to June 2015."

Likewise AMP New Zealand chief economist Bevin Graham says: "We have lowered the OCR peak from 5.25% to 4.50% and shifted next hike out from March 2015 to September 2015."

These forecasts indicate floating rates are going stay put at their current levels for some time. However, longer-term fixed home loan rates, which are governed by offshore markets rather than the OCR, have started falling in the past week. This has had the impact of flattening out the yield curve.

Kiernan, speaking at the Propser mortgage adviser conference last week, said his view is that the best option for fixing at the moment is the three year rate. While there is not much in it, he thinks that with a three-year fixed rate borrowers will be refinancing once the market has peaked. He says the two-year rate maybe a little too early.

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