New Zealand's biggest bank is predicting a larger rise in interest rates than originally forecast, amid rising prices and labour market pressures.
In a 'New Zealand OCR call change' document released on Wednesday, ANZ said it now predicts that the official cash rate (OCR), used as a benchmark for retail interest rates, will rise from the current 0.75 percent to a peak of 3 percent over the next 15 months.
The bank's previous forecast showed an OCR of 2 percent. Further hikes are necessary to control inflation, ANZ says. It anticipates the Reserve Bank will deliver a series of 25 basis point hikes through to April 2023.
"An OCR at 3 percent might raise eyebrows. But it's half the current rate of inflation and well below household inflation expectations, currently running at over 5.5 percent," ANZ says.
The change in the bank's forecast, which amounts to 100 basis points, may seem large - but a corresponding 1 percent rise in CPI inflation would "hardly surprise at all".
"But all that is of course cold comfort to people with massive mortgages to service, particularly if the value of their house is going backwards."
In March 2020, the Reserve Bank of New Zealand followed central banks around the world, delivering an emergency 75 basis point cut to the OCR, taking it to a record low 0.25 percent.
Amid concerns that COVID-19 would derail business and consumer confidence, it introduced a $30 billion Large Scale Asset Purchase programme to inject money into the economy.
Then, as restrictions lifted, New Zealand's economy bounced back, Government support packages and sharply rising asset prices helping to boost spending.
Strong demand, coupled with supply disruptions and labour shortages during COVID-19 have caused inflation to surge. In the three months from June to September 2021, the Consumer Price Index rose by 2.2 percent. Excluding quarters where GST was increased, it was the strongest quarterly increase in consumer inflation since 1987. Annual inflation hit 4.9 percent.
Official inflation figures for the December 2021 quarter are due out late January. Early indications show the Consumer Price Index could come in close to 6 percent (or higher), and continue to rise this year, ANZ says.
"It's looking less transitory by the day as inflation expectations rise and wage growth lifts," it warns.
Following the record lows of 2020, mortgage rates have risen sharply, markets having priced in further rate hikes this year.
ANZ says the move in the OCR was likely to be painful for households, particularly those that borrowed big to take advantage of rising house prices. But the Reserve Bank had little option.
"Given the current level of house prices and household debt, an OCR of 3 percent might be seen as having too high a growth cost to even contemplate," the bank says.
"The fact is, however, that globally, prolonged strong monetary and fiscal stimulus in response to what turned out to be a net negative supply shock has unleashed the inflation dragon. Central banks now have to do what's needed to bring inflation down, painful as that may be."
Referring to the outlook as extreme, the bank forecasts are not to be taken as gospel. But while weak growth or wobbly markets may in the past have meant lower interest rates, this time it's all about inflation.
