A 3 minute read…Summary covers - Mortgage Borrowing Strategy, Inflation Watch, NZ Property Gauge and Economic Overview.
CHIEF ECONOMIST CORNER: INFLATION WATCH
Worried about your interest bill? Then keep an eye on inflation trends. We noted in January that inflation in New Zealand would lift off lows, but that the RBNZ would not respond and hike anytime soon. Six months on, and inflation signals are more mixed and convoluted, which will reinforce the RBNZ’s cautious neutral tone and expectations that the OCR is firmly on hold. Global deflationary forces have reappeared and there is scant evidence of inflation pressures building outside of housing. Not only this, but some housing-related pockets have turned lower again. Technology continues to deflate firms’ pricing ability. Looking forward, a key influence on inflation looks set to be the labour market, which is tightening, and the risk of a bow-wave of catch-up wage settlements is real. If that transpires (and at the moment it is still an ‘if’), stronger productivity growth will be needed to cap adverse inflation consequences and mitigate how far the OCR will need to rise. We continue to expect the RBNZ to lift the OCR in mid-2018. However, risks are skewed towards later, and we are only expecting a gradually removal of stimulus, pencilling in two x 25bps rises per year in 2018 and 2019.
The property market continues to soften, particularly in Auckland. While housing shortages remain and natural population growth and migration is putting pressure on the balance between supply and demand, these drivers are being usurped. The interest rate cycle has turned, credit is harder to come by and LVR restrictions have knocked the investor market. That’s a powerful combination, especially when some regions have severely stretched affordability metrics. Housing activity has slowed, and we expect the market to remain subdued into year-end.
Momentum is picking up from a lull over late-2016 to early-2017. This pick-up will be modest, with the economy facing capacity constraints and late-cycle economic challenges, two of which are finding skilled labour and keeping excesses (namely inflation and house prices) in check. Business and consumer confidence are elevated, the terms of trade buoyant, fiscal policy is set to turn more expansionary, financial conditions supportive, tourism booming and migration strong. We expect solid, but not stellar growth. The OCR will rise eventually, in a slow manner.
MORTGAGE BORROWING STRATEGY
Average mortgage rates remain virtually unchanged compared with a month ago. The mortgage curve is (and has been) “tick-shaped” for a long time, and the 1 year rate remains the “sweet spot”. Wholesale term interest rates have been more volatile, but we see limited scope for them to rise far. Low inflation has bought the RBNZ more time to keep the OCR on hold for longer and the market continues to push out expectations when the OCR might rise. Term rates remain historically low and offer certainty; but 1- 2 year terms are cheaper.
Source – ANZ July 2017 Property Focus