NZ: Floating rates are likely to remain stable - Westpac

Imre Speizer, Research Analyst at Westpac, suggest that NZ’s floating rates are likely to remain stable if OCR remains on hold, while short term interest rates are expected to range sideways, anchored by the OCR.

Key Quotes

“Longer term rates to rise, following US rates.”

“Key risks are economic policy changes by new NZ government, US politics, and US inflation. Interest rate outlooks.”

“In a nutshell, we expect short term rates (up to around 3yrs) to trend sideways because the RBNZ will probably keep the OCR on hold during the year ahead. We expect longer term rates to rise because they typically follow US rates, and we expect US rates to continue to rise.”

“Outlook for floating rates

• We expect little change in floating rates this year or next. That is because floating rates are closely linked to the OCR, and we expect the RBNZ to keep the OCR at 1.75% until Nov 2019.
• That said, there is a wide range of predictions on when the first hike will occur, from some analysts picking as early as Aug 2018. The swap market predicting Feb 2019, and the RBNZ’s forecasting Q1 2020 (slightly upgraded at the Nov MPS).
• The key to forecasting the OCR is forecasting inflation. That is because the RBNZ’s primary objective is to keep CPI inflation inside a 1%-3% range (with a focus on 2%) by adjusting the OCR.
• The RBNZ currently forecasts inflation will hover around 2% during the year ahead, which means it can keep its finger off the hike button in 2018. Westpac’s economists have a slightly more subdued outlook, expecting inflation to average around 1.5% (aside from a temporary spike to 2.1% in December), which is why we think there’s no case for raising the OCR for some time.
• That said, there has been a major change in the domestic economic landscape during the past few months - the change of government and its new economic policies. Some of these new policies are inflationary (minimum wage, Auckland petrol tax), while others are disinflationary (free tertiary education, slower migration, slower housing market). Taking all into account, there’s little impact on our inflation forecasts from a few months ago.”