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Australia & New Zealand

New Zealand

More 50bp hikes coming

We agree with RBA governor Phillip Lowe that market pricing for the Cash rate looks too aggressive. But we also think the consensus is still too dovish. After all, Governor Lowe is starting to grow concerned that wage growth will be too strong to allow the Bank to meet its target. And the RBA is still lagging behind a number of its peers in its hiking cycle. We therefore expect the RBA to hike rates to a peak of 3.1%, higher than the analyst consensus of a peak of 2.60%.

24 June 2022

Inflationary pressures keep building

The big minimum wage hike announced by the fair work commission this week will lead to higher wage growth over the coming year. Given the tightness in the labour market and rising cost pressures, businesses will be forced to pass that rise onto consumers. That suggests the risks to our forecast that inflation will peak just above 7% in Q3, are tilted to the upside. World with Higher Rates - Drop-In (21st June, 10:00 ET/15:00 BST): Does monetary policy tightening automatically mean recession? Are EMs vulnerable? How will financial market returns be affected? Join our special 20-minute briefing to find out what higher rates mean for macro and markets. Register now  

17 June 2022

New Zealand GDP (Q1 2022)

The fall in GDP at the start of the year was due to the disruption to activity from the Omicron outbreak. Growth will have rebounded strongly in the current quarter, but we suspect falling house prices and high interest rates will weigh on growth further ahead. World with Higher Rates - Drop-In (21st June, 10:00 ET/15:00 BST): Does monetary policy tightening automatically mean recession? Are EMs vulnerable? How will financial market returns be affected? Join our special 20-minute briefing to find out what higher rates mean for macro and markets. Register now  

16 June 2022
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RBA could raise rates even faster than we anticipate

We’ve long been arguing that the RBA will lift rates more sharply than most analysts anticipate and the RBA’s surprise 50bp rate hike this week is consistent with our view that rates will reach 3% by early-2023. We’ve pencilled in additional 50bp hikes in July and August, but with inflation set to accelerate further, consumption growth still very strong and the labour market remaining very tight, the risk is clearly that the Bank will continue to hike aggressively for even longer.

Steeper interest rate hikes and larger house price falls

Hawkish shifts by the RBA and the RBNZ in recent weeks have prompted us to forecast an even more aggressive hiking cycle by both central banks in the months ahead. Both central banks hiked rates by 50bp at their latest meeting and we have now pencilled in further 50bp rate hikes in the months ahead. At the same time, house prices have started falling in both countries. House prices are down more than 5% from their November peak in New Zealand. And while prices only just fell in Australia in May, all signs point to the downturn persisting. While we had already expected prices in both countries to decline, the steeper rate hikes we now anticipate will feed through to higher mortgage rates and higher debt repayments. That will weigh heavily on the housing market before long. We have therefore raised our forecast of the peak to trough decline in house prices to 15% in Australia and 20% in New Zealand. And those downturns should cause similar-sized falls in dwellings investment in each country in the years ahead.

Mining’s heydays are over

Mining accounted for less than 10% of GDP last quarter for the first time since 2015 and with mining firms not responding to soaring commodity prices with higher investment, that decline has further to run. Indeed, we think that efforts to decarbonise the global economy will result in mining’s share of output falling to 5% by 2050. While Australia is well placed to cope with lower export revenue, a shrinking mining sector will be a drag on productivity. As such, the incoming Labor government has its work cut out to improve the long-run prospects for the economy.

New Zealand house prices to fall by 20%

House prices in New Zealand are tumbling and all signs point to a further deterioration in the months ahead. On that basis, we are revising up our forecast for the peak to trough decline in prices from 10% to 20%. That’s why we expect the RBNZ’s hiking cycle to go into reverse earlier than most anticipate.

Soaring inflation to trump sluggish activity for RBA

While the economic data released this week were a mixed bag, we think that soaring inflation will trump any slowdown in activity. Indeed, with wholesale electricity prices surging to record highs, it now seems likely that utilities bills will become a major source of price pressures, too. We now expect inflation to surpass 7% in Q3, which may well force the Reserve Bank of Australia to do series of rate hikes larger than the 25bp increase in May before long.

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