Interest rates higher for longer

Darn that stubborn inflation pressure. It’s keeping interest rates higher for longer.

The Reserve Bank wants inflation to ease from its current 4.0% rate to the central bank’s 1-3% target band, which it expects will happen by the end of the year. In the meantime, it warned interest rates needed to stay high.

“While some near-term price pressures remain, the committee is confident that maintaining the OCR (official cash rate) at a restrictive level for a sustained period will return consumer price inflation to within the 1 to 3 percent target range this calendar year,” the Monetary Policy Committee said in a statement.

An OCR cut is now more likely to happen in 2025 than 2024 – and you’d be right to expect a similar story for mortgage rates. New borrowers and those with an existing mortgage will continue to feel the squeeze for at least another six to nine months.

In the meantime, weak GDP growth and job market stagnation are unlikely to create the conditions to put more money in our back pockets.

Not all inflation is equal

The Consumers Price Index (CPI) is the most widely used measure of inflation, gauging inflation as experienced by consumers in their day-to-day living expenses.

The RBNZ is expecting the CPI to land somewhere around 2.9% by the year end. However, the forecast isn’t as rosy as it sounds given that most of the decline is likely to be driven by falling international (or tradables) prices, the smaller component of the CPI.

Non-tradables – or goods and services that can’t be substituted (such as rent or health and recreation services) – make up around 60% of the CPI index.

Tradables inflation is running at just 1.6% annually, whereas non-tradables – or domestic inflation – is still making us squirm at 5.8%.

The RBNZ will want to see a downward trend in non-tradables before it gets too enthusiastic about lowering interest rates.

The worm could be about to turn

Wages are the biggest cost in non-tradables. So, before stamping your feet for a wage rise, remember that until wage growth expectations ease, we’re unlikely to see a positive change in domestic inflation.

But current conditions make it likely. The unemployment rate is at a three-year high of 4.3%, which is making it easier for businesses to secure staff without having to pay a premium. Rising joblessness and falling job security will further ease pressure on wage growth.

The most recent Quarterly Employment Survey saw average hourly earnings rise at an annual rate of 4.8%, which was down on the previous quarter and well below RBNZ projections. Other indicators suggest wage growth will keep slowing. April figures published in ANZ’s Business Outlook placed the firm’s best guess for wage settlements over the coming 12 months at 3.0% – down from close to 6% two years ago.

What does this mean for house prices?

In short, downside risks to NZ house prices continue to linger.  With persistent inflation putting the handbrake on an interest rate decline, coupled with the increasing number of listings as sales volumes soften, we’re unlikely to see much if any lift in property prices this year.

Property prices are flat, but rents are a different story. Call 0800 GOODWINS to get a fix on rental returns for your property.