Fixed rate mortgages may have peaked: Kiwibank
Kiwibank economists think that fixed rate mortgages may have peaked, even though OCR increases are forecast.
Monday, August 29th 2022, 3:01PM
by Eric Frykberg
They even think the Reserve Bank could reverse the rise in the Official Cash Rate (OCR) in the middle of next year.
This comparatively sunny view of the world contrasts with a wave of pessimism over the last few weeks.
The economists base their belief on global developments that emerged from a conference of central bankers at Jackson Hole, Wyoming.
The Governor of the Reserve Bank, Adrian Orr was among them.
Speaking at the conference, the chairman of the Federal Reserve Jerome Powell pledged an unrelenting battle against inflation, eclipsing US loan market hopes that the Fed might ease up.
“We are taking forceful and rapid steps to moderate demand,” Powell said.
According to Kiwibank economists, a reduction in American inflation will bring welcome relief to New Zealand.
“Our imported inflation is likely to fall the fastest, and provide the most relief,” they wrote.
As at June 30, inflation in New Zealand stood at 7.3%, the highest in decades.
While a lot of that is driven by domestic pressures, some of it comes from overseas costs.
The Kiwibank economists think the drive towards higher interest rates in the US will bring down inflation there, which will in turn bring down inflation globally.
As a consequence, there will be less overseas input into New Zealand's CPI growth.
The prospect of higher interest rates in the US has also pushed up the American dollar, lowering the relative strength of the NZ dollar, and making it easier for New Zealand to trade its way out of trouble.
“If our forecasts are realised, the RBNZ may be in the position to start lowering interest rates in the second half of 2023,” the Kiwibank experts said.
“Expectations for the peak in the RBNZ’s cash rate were 4.5% …..since then, expectations have come back, with a terminal rate of a little over 4% priced into the Kiwi short-end.
“We believe the OCR will eventually be lowered back towards a more neutral setting, with rate cuts in the second half of 2023.”
The Kiwibank economists said the timing of the unwind would depend on the world backdrop.
“A global recession would cause a sharp drop in interest rates. Whereas a soft landing would see interest rates ease at a much more modest rate.
“We’re forecasting a soft landing for the Kiwi economy.”
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