RBNZ hiked the OCR (official cash rate) to 5.25% at the beginning of the month in a bid to bring inflation down – and it looks like it finally started to work. The inflation rate dropped to 6.70% this quarter.
The reduction in the inflation rate was unexpected and higher than what most economists were predicting. Does that mean the interest rates will now come down shortly?
The inflation rate is currently sitting far above the Reserve Bank of New Zealand’s (RBNZ) target range of 1% – 3% – hinting that the higher OCR settings are now working. We can expect that the RBNZ will either maintain this rate momentarily or even make a further increase to the OCR by 25 basis points on 24th May. This would likely be the last increase. We are almost at the peak – or nearing the peak, of interest rates.
Most bank economists are predicting that inflation will come down to 5% by the end of 2023, or by the first quarter of 2024. However, that does not mean the RBNZ will start to cut down the interest rates immediately.
First, we need to look at the two types of inflations – tradeable vs non-tradable.
The RBNZ has no control over what happens overseas but at current, tradable inflation is coming down and has recently dropped substantially from 8.20% to 6.40%.
Non-Tradeable: Domestic inflation – food prices etc.
Non-tradeable inflation has gone up from 6.60% to 6.8% which is not a desirable outcome. As a result, we may see another OCR hike of 25 basis points on the 24th of May 2023.
The minimum wage in New Zealand has gone up by 7% from the 1st of April 2023, the living wage is set to increase by 9.9% in September, and the Government will stop the fuel subsidy of $0.30 per litre from the 1st of July 2023.
Overall, it will take some time for the inflation to come down, but there is light at the end of the tunnel and 2024 is looking brighter.
All of the above changes will come into effect from the 1st of June 2023. Combine this with the positive net migrations, lack of rental stock and an increasing number of first-home buyers and you’ll get an idea of where we are heading in a few months.
ANZ’s economists have also adopted a slightly more optimistic tone in their recent property focus report – revising their house price drop to 18% from the November 2021 peak vs 22% previously. On the flip side- RBNZ is also consulting with the banks to bring on Debt to Income restrictions from the start of 2024. This is where a borrower will be limited to borrowing only a certain amount based on their income (could be 6 or 7 times of overall income). This change will affect several investors and will make it harder to invest in property. There will certainly be some exclusions once the framework is finalised.
Overall, it’s a good time to purchase property as long you are in a position to afford it and the lenders are willing to lend you.
Please note: this newsletter is for information purposes only and should not be taken as personalised financial advice. Please contact Sanjeev directly for personal advice.
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