Prior to the brief lockdown slump of 2020, the last time New Zealand was in recession was during the Global Financial Crisis of 2008 and 2009.
“Members noted that a reduction in aggregate demand is projected to cause GDP in the New Zealand economy to temporarily contract by around 1 per cent from 2023,” the committee said.
“Because the New Zealand economy is starting from a position of very high inflation and acute labour shortages, a period of economic contraction is likely as economic activity declines from elevated levels.
“Employment may fall below its maximum sustainable level for a time.
Trying to avoid an economic contraction by limiting any interest rate increases in the near term would likely lead to a longer period of high inflation, the committee said.
In turn, this would likely result in higher interest rates and a larger contraction eventually being required to bring inflation and employment back to a more sustainable path.
“Inflation is nobody’s friend,” Governor Adrian Orr told the Reserve Bank press conference this afternoon. “In order to rid the country of inflation we need to reduce the level of spending in the economy.”
Orr had a message for those kiwis who were still spending and consuming:
“Think harder about your spending. Think harder about saving rather than spending, cool your jets.”
Orr described the forecast recession as a relatively “shallow” economic contraction despite the extended period of negative growth.
He said that at the moment we were hitting record levels of employment and labour scarcity and that was putting upward pressure on inflation.
But there was no specific number for how much unemployment needed to rise, he said.
The RBNZ said the monetary policy committee considered lifting the rate by a full 100 basis points.
The New Zealand dollar rallied by about 30 basis points to US61.80c in the minutes following the release.
Market pricing was evenly split on whether the RBNZ would deliver a 75 or 50-basis point hike.
All the major bank economists also picked 75 basis points.
“The big surprise was in the projected OCR track,” said Westpac chief economist Michael Gordon. “The RBNZ sees inflation as deeply embedded in the New Zealand economy. It now believes that a recession will be needed to bring inflation back within the 1-3 per cent target range in the coming years.”
Westpac’s forecast is for a 5 per cent peak in the OCR by early next year.
“In our view, this remains sufficient to bring inflation under control, with borrowers about to encounter substantially higher retail interest rates in the coming months,” he said.
“However, the risk is clearly for a higher peak in the near term, given the RBNZ’s inclinations.”
The hawkish tone prompted ANZ economists to lift their expected peak for the OCR to 5.75 per cent.
“The 140bp upward revision to the forecast OCR peak is massive, but so too have been the upside surprises to inflation, inflation expectations, and the wage outlook in recent months,” said ANZ chief economist Sharon Zollner.
CoreLogic NZ chief property economist Kelvin Davidson said the move was widely anticipated which meant fixed mortgage rates may not move much straightaway.
“However, floating rates will no doubt rise again shortly, and with more OCR increases in the pipeline, fixed rates are unlikely to have peaked yet either.”Indeed, this was quite a ‘hawkish’ decision from the RBNZ, indicating that the OCR may eventually have to rise all the way towards 5.5 per cent next year.
In terms of what this means for the housing market, he said the higher peak for the OCR (and mortgage rates) has in some ways pushed us into “phase two” of the current property market downturn.
Fixed rates heading above 7%
“With another 0.75 per cent increase in the OCR seemingly on the cards for 22 February next year (with further increases after that too), it’s very likely fixed mortgage rates (e.g. for a high-equity one-year loan) will push towards 7 per cent or above over the coming months, adding to the current pressures on household budgets and mortgage serviceability.”
Based on a current average fixed mortgage rate across the stock of loans of 3.8 per cent, the fortnightly mortgage repayment for every $100,000 of debt (30-year term) is around $215 – or roughly $5,590 per year, Davidson noted.
“But somebody then refinancing to a current rate of 6 per cent would see that repayment jump by $1,602 per year – or more than $8,000 if they had a $500,000 loan.
A potential future rate of 7 per cent would see a change of almost $12,000 for a $500,000 loan. On that note, it’s important to point out 20% of home loans in NZ are currently fixed but due to reprice in the next six months.”
