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Inflation Shock: Could we have another rate hike?

A week ago, our Reserve Bank (RBNZ) made the only call they were ever going to and kept the Official Cash Rate (OCR) at 5.5% where it has been since May last year. Accompanying it was almost no comment at all and this at least partially would have been that the most important data update in guiding them as to what they should do with the cash rate was coming in a week after they had to announce their decision.

Yesterday (Wednesday the 17th) we received the updated CPI numbers for the March quarter to see how the ongoing battle against inflation is going. The initial headline number of 4% was promising but what would have extremely disconcerting for Governor Adrian Orr and the rest of the central bank was that domestic inflation (otherwise known as non-tradeable inflation) came in at 5.8% and well above the 5.3% which the RBNZ predicted back in February.

I’d been quietly confident that we would see the first cut to the OCR later this year and had hoped that if we had received positive news through this CPI update and the following one in July that we may have even seen the rate cut as early as August. It now seems a reasonable chance that the next cut may not come until next year although I note that the economy is in increasingly poor shape and with there being $200b of mortgages that need refixing over the following 12 months and the unemployment rate likely to take a sizeable jump in upcoming months the end of the year is still a long way away and as we have seen over the preceding 6 months forecasts are often being proven wrong.

What has been driving the local inflation has been mixed but dominated by rents which were up 4.7% to March, construction costs and rates which also increased by 3.35 and 9.8% over the same period. Rents are currently increasing at the fastest pace since the data has been collected back in 1999 and no doubt partially caused by landlords trying to recoup some cashflow on the back of not just the interest rate hikes, but also being hit in the pocket with the interest deductibility rules over the last 12 months.

While the decision around fixing needs to take into consideration the borrowers’ individual circumstances in many cases I am still in favour of the 6-month rate although some may wish to take some more certainty on the back of yesterday’s news and look to either fix for 12 months or split debt between the two terms.

Former ANZ Chief Economist Cameron Bagrie wrote an article for Business Desk this morning in which he stated that “there is a 1 in 3 chance the RBNZ will need to hike.”

Next Wednesday the 24th of April I’m running a webinar with Cameron to do a deep dive into this and other factors you should be considering if you are a mortgage borrower or property investor.

Click HERE to subscribe for the webinar.

Kris Pedersen
18 April 2024