Higher interest rate hikes on the way as inflation stays high

Higher than expected inflation figures have got economists scrambling with forecasts of escalating interest rate hikes.

Tuesday, October 18th 2022, 4:39PM

by Eric Frykberg

The consumers price index increased 7.2% annually in the September 2022 quarter, significantly higher than economists had been predicting.

Borrowers will almost certainly be paying the price of this.

In a hawkish statement, Westpac economists Michael Gordon and Satish Ranchhod predicted the Official Cash Rate to now peak at 5%, significantly higher than their previous forecasts of 4.5%.

To get there. the pair are forecasting a 75 point hike in the OCR in November, an increase which is an outlier in recent history.

The pair described inflation as running red hot and “yet to show signs of easing.”

A tight labour market and resilient household spending were getting much of the blame.

ASB senior economist Mark Smith also forecast a 75 point rise in the OCR in November and has an even higher end point for the OCR than his Westpac rivals: 5.25%.

He described inflation as "much too high and becoming ingrained.” As a result, the 75 point rise in the OCR in November would be followed by two more at 50 points each.

Kiwibank economists also forecast a 75 point rise in the OCR next month but see the level finally peaking at 5%, similar to Westpac’s figure but lower than ASB’s version.

This is expected to put more pressure on banks to raise interest rates and could bring hard times to many mortgage advisers.

Earlier published research indicated the rise in interest rates was more than cancelling out any gain to home buyers from lower house prices. So further rises in retail rates will put more pressure still on an already stressed mortgage industry.

In its report, Stats NZ blamed housing and household utilities for the rising price pressure along with higher costs of construction, rentals for housing, and local authority rates.

As an example, prices for the construction of a new house increased 17 percent in a year.

Higher food prices were another culprit along with higher costs of transport.

As an example, international airfares rose 20 percent in the September 2022 quarter alone.

Overall rises for the quarter were 2.2%.

In another comment, Stats NZ indicated foreign pressures could not be blamed for this problem. It said non-tradeable inflation was 6.6 percent in the year to September 2022 quarter, the highest since these statistics have been kept, starting in June 2000.

Tags: inflation