From Independent Economist Tony Alexander
On April 13 the Reserve Bank accelerated its pace of monetary policy with a 0.5% rise in the official cash rate. This followed three rises of 0.25% and was motivated by inflation set to soon exceed 7% as a result of supply chain disruptions and Russia’s war against Ukraine.
Some might think that the extra hike in inflation this year might mean interest rates need to go higher than was generally thought last year, and one or two high profile forecasting groups did raise their rate picks.
But my pick for the peak in the official cash rate has been 3% since this time a year ago, and if I’m going to change that pick it will be more likely to reduce it than increase it to the 3.25%+ pencilled in by the Reserve Bank. Why?
Partly it is because the factors which have pushed inflation much higher this year will be unwinding next year and this will depress inflation, just as we have seen with used car prices starting to fall in the United States. Partly though it is because the target of the Reserve Bank when raising interest rates is to encourage households to pull back on their spending.
I can already see such a pullback is underway from my monthly Spending Plans Survey. Add in falling business confidence and investment plans alongside falling house prices and we get a growing list of reasons why the Reserve Bank does not necessarily have to apply particularly painful interest rate restraint this time around.
In fact it pays to remember that the underlying situation for inflation since the Global Financial Crisis has been outcomes far lower than expected, not higher. As the world one day settles down again this dynamic is likely to re-establish itself.
The upshot is that fixed mortgage rates are likely to peak for almost all terms before the end of this year, at levels ranging from 0.5% to 1.0% above levels just before the latest cash rate increase. Come 2024, rates are likely to be edging slightly lower again.
For additional information on the economy, housing market, and interest rates, you can subscribe to Tony’s free weekly Tony’s View publication at www.tonyalexander.nz
Strategies for Managing Rising Interest Rates
From Isbister Partners
Interest rates continue to climb after beginning to increase last year as central banks around the world try to reign in inflation. This could make some of you a bit nervous as it may be your first experience of a rising rate environment. We’ve come up with some strategies that may help, outlined below:
Disclaimer: This newsletter is meant to be informative and engaging, hopefully not a cure for insomnia. Please don’t take this as personalised financial advice. Discuss your situation with an Advisor. This is where I need to say past returns are no guarantee of future returns.