17 Jun 2021

Earlier interest rate rises may be on way, economists warn

7:22 pm on 17 June 2021

Economists are warning the tide is turning on rock bottom interest rates, bringing with it the prospect of higher debt costs for households and businesses.

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Homeowners should think about splitting their mortgages to lock in a low interest rate for several years, a mortgage adviser says. Photo: 123RF

The scorching 1.6 percent rise in economic growth for the first three months of the year underscored the likelihood that the Reserve Bank will have to start taking its foot off the stimulus pedal and end some of the easy money policies which have cushioned the impact of Covid-19 over the past year.

Strong economies invariably generate inflation pressures and the past quarter has been full of partial data and anecdotes of rising costs from supply chain disruptions, labour shortages, strong commodity prices, and higher energy costs.

"The core drivers of domestic demand, alongside lingering supply disruptions and biting capacity constraints, mean inflation pressures are lifting strongly," ANZ economists said in a note.

To date the Reserve Bank (RBNZ) has regarded the inflationary pressures as transitory and thus something which can be looked through and excluded from its setting of interest rates.

"These price pressures are likely to be temporary and are expected to abate over the course of the year," the RBNZ's monetary policy committee said in May.

RBNZ Governor Adrian Orr told RNZ that the central bank was willing to let the economy and inflation run a little hotter to ensure inflation was truly anchored around its 2 percent target.

The RBNZ signalled in its May statement that it saw a rise in the official cash rate as likely to be needed towards the end of next year.

But economists, who have been talking May as a possible start for rate rises, said the time for rate rises may be sooner than the RBNZ has been thinking.

"With domestic demand ... proving even stronger than we believed, coupled with cost and inflation pressures, there is a growing need to normalise interest rates or risk overstimulating the economy," ASB senior economist Jane Turner said.

ANZ economists shifted their rate rise forecast to February.

"However, a February hike is highly conditional, in light of the Reserve Bank's 'least regrets' approach. In particular, the evolution of inflation, inflation expectations and the labour market are key."

But ASB's Turner said shorter term wholesale interest rates could be expected to rise in anticipation of the RBNZ hikes through this year.

Mortgage adviser Karen Tatterson from Loan Market said longer term rates have already been moving higher and households need to start thinking strategically about their loans.

"They need to think of splitting their loans and move towards the longer term rates - three, four and five years - probably the majority on those terms, and a smaller amount on the rest on the shorter ... which keeps them from rising rates over the next few years but also takes advantage of the lower rates at the moment."

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