Households awaiting interest shock in the anti-inflation front line – economists

Homeowners nervously awaiting the coming interest rate tsunami will end up fighting inflation on behalf of the rest of New Zealand.

Tuesday, October 11th 2022, 6:00AM

by Eric Frykberg

That is because their spending power will be substantially diminished, which will cool demand across the economy, and cause price rises to slow down.

That is a clear inference from new analysis by Westpac Bank economists.

In their latest comment, they think New Zealand might just scrape by with a maximum official cash rate of 4.50%.

That would mean two more rises, of 50 points each, in November and February, which was the interpretation reached recently by the Westpac team.

But they suggest getting even a 4.50% OCR to cool inflation will be touch and go.

“Given the extent of the price and cost pressures rippling through the economy, there have been questions about whether even a 4.50% cash rate will be enough to tame the inflation dragon,” they wrote.

“Those concerns have been reinforced by the resilience in activity over the past year as the OCR has continued to push higher.”

But after deliberation, the Westpac economists chose optimism by a slim margin, saying some, though not all, global price pressures had eased.

Domestically, there was another reason why the inflationary freight train might slow down: the fact that the full impact of interest rate increases to date has yet to be felt by many households.

“Around 90% of New Zealand mortgages are on fixed rates.” they wrote.

“That’s meant many borrowers have been insulated from the impact of rate increases thus far. But that picture is now changing, with around half of all mortgages coming up for repricing over the coming 12 months.

“In many cases, borrowers will face refixing at rates that are 2 to 3 percentage points higher than the rates they are currently on.”

In some cases, this could more than double people's interest bill and leave little money left over at the end of the day to spend on consumer goods.

“This signals a significant squeeze on many households’ disposable incomes, and the related easing in demand will go a long way to dampen the domestic inflation pressures the RBNZ is grappling with,” the Westpac economists wrote.

The Westpac report suggests spending could remain resilient in some parts of the economy, but the diminished latitude for spending by people with large mortgages will go some way to cutting demand for the rest of the country.

Tags: inflation