Grim warning: ANZ picks two more Reserve Bank rate hikes ahead

Strong employment data has prompted ANZ economists to change their forecast for the Reserve Bank’s rate path this year.

In bad news for mortgage holders, it is now forecasting25 basis point hikes in both February and April, taking the OCR to 6 per cent - from its current level at 5.5 per cent.

ANZ has pushed back its forecast for cuts from August to February 2025.

“The RBNZ warned in November that if inflation pressures were to be stronger than anticipated, the OCR would likely need to increase further,” ANZ chief economist Sharon Zollner said.

“Data since then has been a series of small but pretty consistent surprises in that direction.”

In the meantime, yields had fallen substantially as markets have continued to price in earlier rate cuts. The two-year swap is now 70bp lower than its October 2023 peak, she said.

“Policy is ‘running to stand still’ in that context,” she said.

Zollner described the risks around the rates forecasts as “balanced”.

“As we’ve stated, February is a line-ball call. If they don’t hike in February, we think they will in April, unless we start to see meaningful downside surprises. On the other hand, risks are tilted towards cuts coming earlier than February 2025, given we think restarting hiking will have pretty powerful shock value, as it’s been widely expected that rates have peaked.”

The RBNZ would be well aware that restarting hiking cycles when per capita GDP is down 3 per cent (year on year) might appear counterintuitive, she said.

“But at the end of the day, they have a job to do: to get inflation sustainably down to 2 per cent in the medium term. We just don’t think the RBNZ Committee will feel confident that they’ve done enough to meet their inflation mandate. The buck stops there.”

On Wednesday, new labour market data showed unemployment rose to 4 per cent in the December quarter - but the market had anticipated 4.3 per cent.

Economists saw that as likely to be interpreted by the Reserve Bank as a sign that the economy is holding up better than expected and could increase pressure to hold interest rates at current levels for longer.

Zollner also cited higher than forecast non-tradable (domestic) inflation in the December consumer price index data (a 0.2 per cent upward surprise), continued high net migration gains and a bounce in commodity prices as pointing toward a higher OCR.

Because it was such a big move to re-start a hiking cycle, the bank was unlikely to do it for just a 25 basis point move, Zollner said.

“We therefore see a follow-up hike at the next meeting in April both signalled and delivered, barring unexpected developments, taking the OCR to 6 per cent.”

The RBNZ might decide to wait until they had more evidence that hikes were needed and choose rather to talk risks and try to support yields that way, she said.

“But they did that already in November, with what you’d have to say are mixed results – the market hasn’t gone to town pricing cuts, but yields have still fallen meaningfully.”

The new OCR forecasts implied further upward pressure for fixed-term interest rates, with most of the upward revision coming through at the shorter end of the yield curve, where rates are more sensitive to RBNZ policy, Zollner said.

That might offer some respite for those on longer-term fixed rates.

“Even though we expect the OCR to peak at 6 per cent, because we also expect cuts from early 2025 (which markets are likely to assume will be delivered sooner), we don’t expect the two-year swap rate to peak anywhere near where it peaked in October (around 5.8 per cent), and instead we expect it to rise to around 5.2 per cent.”