Official Cash Rate Explainer: Why Interest Rate Hikes Are the Answer and Will They Really Reduce Inflation?

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He also stressed that the Kiwis do not question its effectiveness when interest rates are low, however unpleasant it is necessary.

“It will take time and it will certainly bring huge challenges. But it seems like the best way to go about it.”

“While we’re happy to take the gains from low interest rates last year, we’re in pain from higher interest rates this year. That’s on a general economic level.

“[But] it is those young people who have entered the housing market in recent times, who have run into debt at very low rates, who are now being punished the hardest.

“So there are definitely distribution issues and we’re not ignoring them. But there are broader inflation concerns that kind of override them,” he said.

Where to go from here?

New Zealand faces a long battle to get inflation back within the RBNZ’s 1-3% target, with most economists predicting the OCR will continue to rise next year.

This means that homeowners should expect their mortgages to become more expensive for some time.

Given the higher than expected CPI data, ASB predicts now a 75 basis point increase in OCR in November, followed by a 50 basis point increase in February and a final increase in April of 50 basis points. If this happens, the OCR will peak at 5.25%.

This is a view shared by Jarden Investment Strategist and Economist John Carran who said a 50 basis point hike is “almost certain” in November.

“It is likely that some members of the monetary policy committee will push for an OCR increase of 75 basis points at the next meeting, given that this option was discussed at its last meeting.

“If the September quarter labor market data shows continued heat with faster-than-expected wage growth, we would be wrong to expect 75 basis points as well.

“However, at this stage, we expect the Committee to stick to a 50 basis point hike in November, but will likely indicate in its November monetary policy statement further significant OCR increases at the during the first semester of 2023.”

But Carran expects the OCR to peak slightly below the ASB, predicting it will hit 4.75% by the middle of next year.

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