Interest rates

Interest rates to soar, house prices to fall further as war drives inflation up – Reuters

Business

ANZ economists warn house prices will fall 10% this year. Photo/NZME

ANZ economists are now forecasting back-to-back 50 basis point rises for the official exchange rate in April and May and are warning house prices will fall by up to 10% this year.

The revised forecast released this morning comes after oil and other commodities have soared sharply in recent days as the war in Ukraine and sanctions on Russia have rattled markets.

“We now see OCR peaking at 3.5% in April 2023 ([he previous forecast was 3 per cent]. We now expect house prices to fall by 10% this year,” said ANZ chief economist Sharon Zollner.

The OCR is currently at 1% after increases in October, November and February.

“Oil is the big deal, with crude futures climbing to near US$140 at one point this week, rather than starting a comeback to US$80 as the RBNZ had assumed in February.”

The OCR call change was mainly on the back of ANZ’s updated consumer price index forecast which now has inflation peaking at 7.4% in the second quarter, rather than forecasts for the RBNZ from a peak of 6.6% in the current first quarter. .

“RBNZ would rather look through oil price shocks, but right now, with inflation expectations so high and rising, it just can’t,” Zollner said.

Given the extreme volatility, it is currently very difficult to predict movements in oil prices, she said.

“But there seems little hope that the situation in Ukraine will be resolved quickly, and we know that the sharp increase in fuel prices will be particularly visible.

“Petrol prices have a much bigger impact on household inflation expectations than their weight in the consumer price index would suggest. And this is where things get very problematic for the RBNZ”

Sharon Zollner, Chief Economist of ANZ Bank.  Photo / Dean Purcell
Sharon Zollner, Chief Economist of ANZ Bank. Photo / Dean Purcell

The Reserve Bank was now “overdue,” Zollner said.

“With the credibility of inflation targeting itself at stake, the good things to have – like exercising caution due to the risk of a harder-than-expected economic landing – have to be tossed aside.

“Any upside inflation surprises, whatever the source, will have to go directly into the RBNZ’s forecast OCR track and its actual OCR decisions.”