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English-speaking Central Banks are slowly getting it

English-speaking Central Banks are slowly getting it

Wednesday was a big day for the English-speaking Central Banks. The Bank of New Zealand, the first of the Central Banks to realise inflation was becoming a significant issue, commenced tightening their monetary policy from 0.25 per cent on 6 October 2021. Wednesday was their sixth increase to 2.5 per cent, and it will be interesting to see the degree this crunches the New Zealand economy over the next few months.

The US printed an increase in inflation of 9.1 per cent, June 2022 on June 2021, up from 8.6 per cent in May 2022 on May 2021, and a new 41 year high. The probability of another 0.75 per cent increase to a range of 2.25 per cent to 2.5 per cent, at the next Federal Reserve Board Meeting in late-July just got higher.

And the Bank of Canada responded by hiking interest rates by a full one percentage point from 1.5 per cent to 2.5 per cent, the largest increase in 24 years. Governor Tiff Macklem warned of more hikes to come.

That leaves Australia and the UK well behind the pack at 1.35 per cent and 1.25 per cent, respectively. At their next Central Bank meetings of 2 August and 4 August, respectively, a minimum 0.5 per cent increase to 1.85 per cent and 1.75, respectively, is just about guaranteed. Neither the Australian or British Central Banks can get too far below the US official cash rate, or their currency will continue to decline against the US Dollar. 

So far this year, the US Dollar/Australian Dollar exchange rate has declined from US$0.7250 to $0.6750 (-7 per cent), whilst the British Pound to the US Dollar has declined from US$1.36 to US$1.19 (-12.5 per cent). Currency depreciation is good for exports, it generally means imports become more expensive, adding pressure to an already slowing economy.

Official cash rate increases – date, level and short-term estimate (E)

New Zealand % USA % UK % Canada % Australia %
6/10/21 0.50 17/3/22 0.25 16/12/21 0.25 26/1/22 0.25 6/4/22 0.35
24/10/21 0.75 5/5/22 0.75 3/2/22 0.50 2/3/22 0.50 8/6/22 0.85
23/2/22 1.00 15/6/22 1.50 17/3/22 0.75 13/4/22 1.00  5/7/22  1.35
13/4/22 1.50  27/7/22(E)     2.25 5/5/22 1.00 1/6/22 1.50  2/8/22(E) 1.85
25/5/22 2.00     16/6/22 1.25  13/7/22  2.50    
 13/7/22  2.50      4/8/22(E)  1.75        

Given the Reserve Bank of Australia (RBA) commenced their tightening cycle on 6 April 2022, exactly six months behind the Reserve bank of New Zealand (RBNZ), it is advisable to look over “the ditch” as a guide to how their economy performs over the balance of 2022.  Recently released data reveals a 10 per cent decline in average house prices, in conjunction with a crunch in consumer confidence.

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This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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10 Comments

  1. ben lebsanft
    :

    its interesting that at least the NZ bank was at least signaling the issues it saw up ahead.

    The costs in construction material etc. was the issue.

    I find that when we have cheap rents[ relatively]is always a signal that costs are going to rise .
    people don’t say gees rents are cheap i,ll go rent another house!
    they buy one, and then most likely renovate as well .
    pushing up prices, and increasing labor costs etc.
    I don’t understand why logic is not taken into account in forecasting
    economics, while you can measure and measure , in the end you have to look at the likely behavior of the collective’s group.
    enjoy the articles
    regards Ben lebsanft

    • Hi Ben, most “experts” rarely get ahead of the pack, particularly at turning points. Sometimes it is too risky for career prospects; sometimes it is easier to be an expert after the event; and often it is simply because forecasters get it right about 50 per cent of the time. It has surprised me, though, that the experts have not been watching the New Zealand play book more closely. Up until very recently that is!
      RE forecasting, who would have bet on Cameron Smith securing a closing 30, 6 under par, on the back nine of The Open Championship early this morning, for example?

  2. So we can’t do what’s required because it will cause some housing pain for a few. My understanding is one third own a home outright, one third rent, and the other third have a mortgage. Out of that last third say 20% are at risk. That’s 6% of the population. So the rest of us have to suffer manipulated interest rates for the 6%. Maybe my figures are wrong – happy to be corrected.

    • Hi Ian, at the peak we know the value of all housing approximated $10 trillion (10.5m homes X $0.95m average),and there was around $2.1 trillion of debt. You are right, around one-third of the homes or 3.5m are home owners (as distinct from investors which account for around $0.7 trillion of the debt) with a mortgage. You are also correct regarding the 6 per cent estimate. In 1993, the UK had a little over 20m homes, and around 1.0m of those homes fell into “negative equity territory” – where a lot of people could legally “put the keys on the table and walk away”.

  3. Stuart Kewish
    :

    I would like to see 0.75% for the next increase. When people borrow excessive amounts of money to buy over priced houses when interest rates are low there was always going to be some pain when rates went up. I believe there was too much stimulus during covid. Housing affordability is becoming such a major problem for young people these days and into the future. Neither side of politics has any real plans to improve housing affordability. It will potentially be made worse when migration numbers increase again soon (needed for employment but will put more upwards pressure on housing) affordability. Allowing people to access their super, giving first home buyer grants to buy a house or any of the other schemes doesn’t increase affordability, only changes where the money comes from. At it’s simplest, rue housing affordability improvements come from lower prices or higher salary/wages. But much of Australia’s wealth is measure by our housing ownership so no government is going to want to adopt policies to deliberately lower house prices. And we don’t want wages rising too quickly either. This is a long term problem to fix and it seems too hard for our short election cycles. We need more builders for one.
    I am curious how many investors own multiple homes and get multiple benefits from negative gearing. I don’t know if there are statistics on this but I would love to see them. I would love to see negative gearing rules changes so only the first 2 investment properties can be used for negative gearing. The way house prices are going only the rich will be able to afford them tying a bigger percentage of our future population into renting every year but at high rental rates that should instead be paying a mortgage off if only people could afford to buy the house instead. But what politician will limit negative gearing when they are part of the more wealthy group that can and do have multiple investment properties. Maybe that is all too simplistic but we have to start somewhere as fixing housing affordability will in my opinion take a generation but only if we start doing real things now.

      • Stuart Kewish
        :

        Further to this, I have a lived experience where a very wealthy Melbourne TV personality had his representatives come to a small country town in Victoria (population less than 6,000) and buy over 30 houses as investment properties. Housing prices doubled in about 12 months and young people couples could not find a house to start a new life in. The TV celebrity was a multi-millionaire who didn’t need to buy 30+ houses in one small country town to be financially secure in his future. He did it only for the tax concessions of negative gearing.

  4. The housing market will crash like you wouldn’t believe if interest rates go as far as economists think and stay there for any length of time.

    • I agree Phil, and given the amount of consumer debt I suspect most English-speaking Central Banks will see their Official Cash Rate max at at around 2.5 per cent. The RBNZ got there from 0.25 per cent in October 2021 to July 2022 – 9 months – and the NZ consumer confidence surveys are getting smashed. I suspect many other English-speaking economies are only a few months behind them.

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