The RBNZ is out hiking rates like a mad man. Are we next?
So the Reserve Bank of New Zealand (RBNZ) hiked the official cash rate by a thumping 75 basis points last week.
That’s the biggest single increase since the official cash rate was invented! (It was in 1992.)
They’ve now had 400 basis points this cycle, taking the cash rate to 4.25% – the highest level since December 2008.
And not that its anything to be particularly proud of, but the RBNZ now leads the world. They were the first bank in the anglo-sphere to hike back in October last year, and they’ve now hiked rates more than anyone.
Go for gold, New Zealand. Go for gold.
But the question that someone asked me was, if that’s what’s happening over in New Zealand, are we next? Is that just where we’re going, only with a six month lag?
The answer is no, I doubt it.
It is true that inflation is too high, just like it is here. The official inflation rate is at 7.2%, miles above the 1-3% target band.
And food inflation is running at 10% in October – a 14 year high.
That’s not too far off what’s happening here.
But there are some important differences.
First, wages are growing strongly. Average hourly earnings in the private sector are up a whopping 8.6% over the past year.
(Compared with just 3.1% in Australia.)
So that will be making the RBNZ nervous. That’s starting to look like a wage-price inflation spiral is starting to build.
They’ll want to stomp on that grass fire pretty quickly.
But the second thing is that the RBNZ has to work much harder than the RBA because of the way that the mortgage market is structured.
In New Zealand, fixed rate mortgages are much more common – they’re almost universal. 90% of the market is fixed.
(Compared with about 30% here.)
That means that many households simply wouldn’t have been affected by the RBNZ’s hikes. If a borrower fixed in 2020 or 2021, all the RBNZ’s huffing and puffing just hasn’t touched htem yet. It hasn’t fed through into their monthly expenses.
It will, in time. In fact, Westpac reckon that a full 50% of the mortgage market will be coming off fixed rates over the next 12 months.
Those borrowers are going to be in for a very rude shock, facing mortgage rates that twill be 300-400 basis points higher.
But for now, this makes the RBNZ’s job very hard.
They want to stomp on demand to try and break the back of inflation.
But they can’t touch demand directly, because so many households are immunised to rate hikes because their fixed.
The RBA’s job is much easier in this sense, since so many people feel the effects of a rate hike immediately.
So the RBNZ just has to hike more to get the same bang for their buck.
Which is why I just don’t see Australia going anywhere close to New Zealand’s example.
My personal bet is one more and we’re done. Maybe two.
A variable mortgage market should save us from the Kiwis fate.
JG.
ed koken says
“Go for gold, New Zealand. Go for gold.”
Could you comment of why gold? Is gold a hedge for inflation?
Thanks