ANZ warns OCR will hit 3% next year ‘painful as that may be’

Business

Homeowners could face significantly higher borrowing costs, with New Zealand’s largest bank predicting OCR could reach 3% by April 2023. Photo/Stephan Stockinger

New Zealand’s biggest bank predicts interest rates will have to rise much more than it previously forecast, as central banks face an uphill battle to contain inflation.

On Wednesday, ANZ said it now expects the official benchmark spot rate (OCR) to peak at 3% over the next 15 months, from 0.75% currently.

Previously, ANZ had forecast the OCR to peak at 2% in the current cycle.

At the start of 2020, the Reserve Bank of New Zealand followed central banks around the world in reducing the OCR to a record low of 0.25% and promised to inject money into the economy to maintain the demand, amid fears that Covid-19 could affect business and consumer confidence. and cause a deep recession.

While many economies have suffered a deep recession, New Zealand’s economy, like many others, has come back to life with the lifting of restrictions, government subsidy-spurred spending and sharply rising asset prices.

ANZ Bank Chief Economist Sharon Zollner warned that an OCR of 3% would likely be painful, but would be necessary to get inflation under control.  Photo / Dean Purcel
ANZ Bank Chief Economist Sharon Zollner warned that an OCR of 3% would likely be painful, but would be necessary to get inflation under control. Photo / Dean Purcel

Strong demand, combined with supply disruptions and labor shortages, has pushed up inflation. In the three months ending September 30, the consumer price index rose 2.2%. Excluding the quarters where the GST was increased, this is the strongest quarterly increase in consumer inflation since 1987. Annual inflation reached 4.9%.

While many economists previously predicted inflation was likely to be a temporary anomaly, continuing supply issues and growing signs that workers are demanding wage hikes to meet the cost of living are raising expectations. about the persistence of inflation.

ANZ said inflation figures due out later this month could show the CPI rose nearly 6% at the end of 2021 and could continue to rise throughout this year.

“It looks less transitory day by day as inflation expectations rise and wage growth picks up,” said ANZ chief economist Sharon Zollner.

In 2021, the RBNZ became one of the first central banks in the world to start raising borrowing costs as it tried to counter rising prices, with hikes of 0.25 percentage points in October and November.

Adrian Orr, Governor of the Reserve Bank of New Zealand.  Photo/Mark Mitchell
Adrian Orr, Governor of the Reserve Bank of New Zealand. Photo/Mark Mitchell

Mortgage rates have already risen sharply from record lows in 2020, as banks anticipate further increases this year, putting pressure on households who have borrowed to take advantage of rising house prices.

Zollner said the OCR’s move was likely to be painful, but the Reserve Bank had little other choice.

“Given the current level of house prices and household debt, an OCR of 3% might be seen as having too high a growth cost to even consider,” she said.

“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 set off the inflation dragon. Banks Central governments must now do what is necessary to bring inflation down, as painfully as possible. It can be.”

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