How do we know what to expect from the future?  You can look at history and predict an outcome from there.  You can draw on lots of different perspectives, gain opinions from different types of people, to get a wide range of possibilities.  Will this lead you to an accurate prediction of the future?  What will our world look like in in 6 months’ time, in 30 years’ time, what will the impact of climate change be, will the war in Ukraine be long finished.  What will AI look like in the future?
 
One of the most common questions we are asked as Advisers is “when are rates coming down.”  This leads into, “how long should I fix my mortgage for.” 
 
The answer to the question, how long should I fix for is not a simple one.  We are living in a time of rapid change, where unpredictability is the new “normal”! 
On the Stuff webpage on 13^th February, it notes “Markets had been pricing in an official cash rate cut from the middle of this year. The sharp fall in wholesale rates had prompted calls for banks to cut home loan rates more aggressively. 
But now the market has changed its mind.
ANZ said on Friday that it now expects the official cash rate to increase twice more this year, a sharp change from an earlier prediction that there would be a cut in August.”
 
On January 24^th, an economist was noted as saying in an article on the RNZ website that, “inflation was starting to decline at a much more rapid rate "and it won't be too long before we have a number with a three in front of it".
 
The unpredictability of predictions!  As can be seen time and again, predicting the future is a tricky business. 
 
According to Tom Standage, Deputy Editor of the Economist, the general consensus at the end of 2022 was that inflation would be on the way down in 2024.  However, the war in Ukraine pushed up the price of energy and food which meant that inflation stayed higher for longer than expected.  In more recent times, disruption in the Red Sea has led to the cost of freight increasing as ships have to go from China, around the bottom of Africa, which is increasing the cost of freight, which impacts inflation.  This is a smaller effect than the Ukraine war and the pandemic but will mean rates are unlikely to come down as quickly as people were thinking 6 months ago.  As a result, rates are not likely to come down as quickly as we had expected.   Unpredictability is the new “normal”! 
 
More than half of the world’s population will be holding national elections this year.  What impact will these elections have on our economy?  The USA, UK and Russia are a few of the big nations facing elections.  The consequences of the American election in particular are global.  With Trump looking likely to be the republican candidate, what will this impact?
 
However, this isn’t going to stop us from making predictions!  We share Tony Alexanders view that employment data and inflation data lags.  As advisers we’re on the ground.  We’re definitely seeing higher interest rates impact on jobs and spending. 
 
From Independent Economist Tony Alexander:
 
There are a couple of new factors in play making buying and borrowing decisions for people slightly more confusing. First, it is near certain that in the middle of this year Debt to Income lending restrictions will commence.
 
The two key rules are banks cannot have more than 20% of their lending to owner occupiers where total debt will exceed six times gross household income, with a seven times rule for investors. New builds and Kainga Ora will be excluded. Given that only 5% - 8% of loans exceed those ratios currently there will be no impact. That will only come when the housing market next becomes frenzied and that is not imminent.
 
Second, with some stronger than expected data on employment recently released some key forecasters have chosen to reinstate their expectation that the Reserve Bank will lift their official cash rate two more times to 6.0%. That is unlikely.
 
Much of the lagged effect of past rate rises has yet to strike householders because they have yet to roll onto 7% fixed lending rates. Labour market data tend to be old and sometimes unusually volatile. Plus core inflation measures the Reserve Bank tracks are falling at least as fast as they earlier surprisingly rose.
 
For now, most people continue to prefer fixing for terms of one year and less and that’s probably what I would do also. The way retail spending is being crunched tells us the economy is weak and this will eventually show through in much lower inflation than the current 4.7% rate.
 
The first easing of monetary policy can still easily come before the end of the year. But for now general confusion is likely to cause some people to step back temporarily from the housing market, thus lengthening the period during which first home buyers can make a purchase with few other bidders on hand.
 
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
 

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.