The Reserve Bank of New Zealand will hike the official cash rate by a quarter point as soon as September as the economy shows more signs of life and inflation starts to bite, AMP Capital Investors says.
The fund manager, which oversees more than $12 billion in New Zealand assets, is picking central bank Governor Alan Bollard will hike the official cash rate 25 basis points at its September meeting after a surprise surge in first-quarter growth and faster-than-expected inflation in the three months through June.
AMP Capital head of fixed interest Grant Hassell told a media briefing in Wellington that the risk for Bollard is that if mortgage rates don't go up faster than he hikes, homeowners may jump into fixed terms and damp his ability to gain traction with future increases.
More than half of all mortgages are on floating rates, meaning borrowers are susceptible to shifts in the benchmark interest rate.
"By doing 25 basis points, you'll see a jump up in fixed rate mortgages as the market factors in more and more rate hikes," Hassell said.
"The biggest risk is if he does 25, and the two-year rate doesn't adjust quickly enough and everyone jumps."
Bollard cut the OCR 50 basis points in March to 2.5 per cent in response to the February earthquake in Christchurch, and said he won't remove that stimulus until he sees signs of the rebuild stoking economic activity in the June monetary policy statement.
Hassell said two-year-ahead inflation expectations were already near 3 per cent, the top of the Reserve Bank's target band, and the latest data will probably push that higher.
"That's troubling for the Reserve Bank," Hassell said.
The turnaround in New Zealand's economic fortunes comes as Australia's central bank is facing a two-speed economy and Westpac Banking is picking the Reserve Bank of Australia to cut interest rates by as much as 100 basis points over the coming 12 months.
AMP Capital's Sydney-based chief economist Shane Oliver said the divergence in the two nations' monetary policy would stoke further demand for the New Zealand dollar, which today hit new post-float highs at 85.66 US cents, and that could take the kiwi even higher.
"It might go through a short-term pause, but I think the odds of it reaching parity are still fairly attractive," Oliver said.
Still, he didn't think the kiwi would catch its Australian dollar counterpart.
The fund manager's head of equities, Guy Elliffe said there was some merger and acquisition activity going on as issuers try to beat the government's proposed partial sell-down of state-owned enterprises.
The government wants to raise as much as $7 billion by selling down minority stakes in electricity retailers Genesis Energy, Meridian Energy, Mighty River Power, coal miner Solid Energy and airline Air New Zealand Ltd.
AMP Capital's funds kept an over-weight bias to global shares, which are outperforming local equities. It made a 7.5 per cent loss on unhedged global equities in the three months, while hedged global shares returned 2.4 per cent. New Zealand shares lost 1.2 per cent in the quarter.
Its local fixed interest fund returned 3.6 per cent in the period, beating global bonds' 3.1 per cent return, while global property was the pick of the asset classes, up 6.1 per cent in the three months ended June 30.
Australian equities dropped 7.4 per cent in the period, while New Zealand property gained 1.6 per cent.