Westpac now tipping OCR to lift to 3.75% next year after strong GDP figures; ANZ economists say RBNZ 'may not have luxury' of waiting till March to hike rates


Westpac economists are now picking that the Reserve Bank will hike interest rates five times next year in response to the strongly growing economy.

In the wake of the stronger than expected 1.4% GDP growth for the September quarter, Westpac senior economist Michael Gordon said the bank's economists now saw the Official Cash rate hitting 3.75% by the end of the year, up from their previous pick of 3.5%.

"...We believe that recent developments – stronger than expected near-term growth, the Fed’s early ‘tapering’, and the reduced risk of rate cuts by the Australian central bank in the near future – could encourage the RBNZ to move faster than previously signalled.

"We now expect three consecutive OCR hikes from March to June (previously we expected the RBNZ to pause at the April review), with further hikes in September and December, bringing the cash rate to 3.75% by the end of next year," he said.

ANZ economists now rate the chances of an interest rate hike in January at 1-in-3.

Senior economists Mark Smith and Sharon Zollner said the Official Cash Rate (at 2.5%) is "lower than it needs to be".

"With the demand picture assured the question is rapidly becoming how much capacity the economy has to meet this demand without generating inflation, particularly given the construction-specific nature of growth outside the dairy boom," they said.

"Our core view continues to be that despite today’s data surprise, the Reserve Bank will begin to lift the OCR in March, given they would naturally prefer to kick off a tightening cycle with a full Monetary Policy Statement and press conference to explain their actions.

"However, they may not have this luxury. Two key pieces of data are set to be released before the OCR Review in late January: the Quarterly Survey of Business Opinion, and Q4 CPI.

"Should capacity and inflation indicators from the former, and non-tradable inflation from the latter, print higher than Reserve Bank expectations (and we think they will), a January move is certainly in play. It is becoming increasingly clear that the Official Cash Rate is lower than it needs to be. We would currently put 1-in-3 odds on a January move."

The numbers

Statistics New Zealand said Gross Domestic Product rose 1.4% in the September quarter on the back of the largest expansion in the agricultural sector in 25 years.

The extremely strong result, on the back of a rebounding dairy market following drought earlier this year, is stronger than the average expectation of economists for a rise of 1.1%.

The Reserve Bank also forecast a 1.1% rise, so the higher than expected figure will give the central bank encouragement and room to begin its expected cycle of interest rate rises early next year.

The dollar immediately spiked from US82.2c to US82.6c before retracing to US82.35c and then falling back toward US82c, which may well be more about reaction to the news that the US Federal Reserve is beginning the long-expected "tapering" of its accommodative monetary policy.

This increase in GDP is the largest since the December 2009 quarter and follows a revised 0.3% (from 0.2%) rise in June.

Stats NZ has carried out changes to the methodology and extensive revisions to previous GDP information. See here for the Stats NZ information release on the latest GDP figures.

Weaker in some sectors

ASB economist Christina Leung said beyond the effects of the drought, although there was weaker activity in some sectors over Q3 they generally reflected payback after a strong first half of the year.

"This is particularly the case for heavy and civil engineering construction and professional services. Heavy and civil engineering tend to be volatile from quarter to quarter, reflecting the lumpy nature of many infrastructure projects. The underlying trend for overall construction activity remains one of improvement, and we continue to expect the Canterbury rebuild and stronger house-building demand to drive construction growth over the coming years."

She said the result provided "further encouragement" for the RBNZ that the NZ recovery is on a solid footing.

OCR timing risks 'shifting'

"We still expect the RBNZ to first lift the OCR in March, but this latest outcome shifts the risks to a more even balance around March than our slight bias to a later start.  The RBNZ still has a couple of other factors to consider: one, the reaction to the Fed tapering announcement has not dented the strength of the NZD as yet and the recent strength could persist; two, assessing the LVR impact will still be difficult in January."

Minister of Finance Bill English said New Zealanders’ "hard work"  was now starting to pay dividends.

"Despite the worst drought for several decades earlier this year, New Zealand now has one of the faster growing developed economies in the world."

English said New Zealand’s latest 3.5% annual economic growth (from September 2012-September 2013) compared with 2.3% in Australia, 1.8% in the US, 1.9% in Canada, 2.4% in Japan, 1.5% in Britain and a negative 0.4% in the Euro area. Growth across the OECD averaged 1.4% in the year to September.

Strong dairy


"Dairy farming has really bounced back from the drought this year," Stats NZ's acting national accounts manager Steffi Schuster said.

"The increase in agriculture is the largest in more than 25 years, as good weather boosted production well above the weak June quarter."

Dairy product manufacturing also increased this quarter, which contributed to a 1.5% rise in total manufacturing.

While manufacturing production was up, exports of dairy products fell this quarter, leading to a build-up of inventories. The $770 million increase in total inventories this quarter is the largest build-up since the series began.

Increases in agriculture and manufacturing production were partly offset by declines in:

  • Construction (down 1%), as falls in infrastructure and commercial construction outweighed an increase in housing construction. Investment in housing was up 8.5% from the previous quarter.
  • Business services (down 0.8%), with most sub-industries down, except for architectural and engineering services.

Economic activity for the year ended September 2013 was up 2.6%.

The expenditure measure of GDP was up 1.1% in the September 2013 quarter. The main movements were:

  • Investment in fixed assets (up 3.1%), driven by increased imports of plant, machinery, and equipment. This was also reflected in a 4.5% rise in imports of goods and services.
  • Build-ups in manufacturing and distribution inventories, as supply of goods exceeded demand this quarter.
  • Volume of spending by New Zealand households (up 0.4%), mainly due to increased spending on durables like furniture and motor vehicles.





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Predictions for a bumper 2014 look to be on the money, so-to-speak.

Other way around.

High inventory speaks of large costs and poor profit margin. (good cashflow, but poor margin - as you only make profit on trabable goods after enough have been liquidated to cover your costs....and with high inventory that tends to mean you end up flooding your own market and the last remaining items...your profit margin...is flogged off cheap in a satuated market just to get rid of them. )

Low inventory tends to mean cashflow is tight (and credit in demand) but that means demand is high for production and commodity goods and services, low inventory means the profits are in hand, and not tied up sitting in some warehouse/dock/shopfloor.   Low inventory means customer demand pulls up prices (premium margins) and that's good for business for suppliers who are hiring/buying.  Just careful of the interest rates.

Also a review of Stats NZ data revision policy is possibly called for:
Nominal GDPE annual growth for the year ending September 2013 recorded @ 2.9497%
Revised nominal GDPE annual growth for the year ending June 2013 recorded @ 1.6439% Originally disclosed @ 2.0715%.
The majority of the revision was caused by upward movement in the far year GDPE release.

We'll see similar effects when, like Aussi Iron, the Asian markets decide they have enough stockpiled milkpowder and drop the suppliers (hoping to stall the industry, and overvalue their holdings).  At least with steel and milk powder they can keep troops busy...  Not only can you not eat money, you can't use it to hold territory either.

Houses and Herds.   :)

Time to Party like its 1985!

Happy days are here again .
The A -Team of John Key and Bill English have  done a brilliant job steering us through the GFC.
We all thought his laissez faire hands off the wheel policy was dangerous , but it was right to allow the free market to do what it does best:: -

  • Market flexibility was allowed a free hand
  • Weak businesses failed
  • Property speculation was exposed for what it was
  • Badly run Finance Companies failed
  • Structural adjustments took place in the labour market
  • The inefficient and uncompettitve manufacturers who could not compete closed.
  • They  continued to help the unemployed
  • They  stimulated the economy with infrastruture spending
  • No one died during the recession due to famine, pestulence or disease
  • Those business that were well run are still here , leaner , fitter and rearing to go

Well done National , see ya back in office in  2014

They're doing such a good job it's hard for anyone to find fault.  They have plenty of room to offer some carrots to the swing voters before the next election then we can look forward to more prosperity. 

Brace yourselves Peek Boom is comming

I think you mean peak OCR.

OCR is irrelevant to my business decisions, so who cares.

Your customers.

[Deleted comment. Personal abuse not acceptable. Ed]

Was it the Amway comment? 

Why are they picking Rises in the non-tradeable? Strikes me as cherry picking. Surely in effect rises in the non-tradeable have the same impact as as an OCR rise? ie its taking momney out of ppls pockets they have no option but to pay.   So my focus would be the tradeable.

Do you now believe Steven? Start fixing cuzz because your shortterm floating mortgage gains will be swallowed like Jonah 

Nope, unlike you i dont knee jerk and then look around for support so you feel happy. Ive looked at the RB's projections and, no based on what the say and what I think Im likley to save by staying floating, though fixing for 1 year is a small maybe.
They are picking non-tradeables, something guaranteed to rise, v tradeables that are hurting.

Agree with you steven. But there is no "look through" until it is too late. Inflation is inflation as far as many are concerned. It doesn't seem to matter where it is derived from, which is a major flaw in modern monetary policy IMO.
For an insight of where the NZ economy may be headed:
India is a different economy to ours but we may face similar issues to their current ones, further up the track.

What Ive not seen yet is any rational comment from the RB's on how expensive energy is impacting their "calcualtions"  Strikes me they are ignoring it.  The result is were we use energy the economy is hurting and stagnating....
Interesting piece, he actually comments on oil and how the OCR has no impact.

"Yet, the fact is RBI's monetary policy can achieve nothing as far as food, vegetables or fuel prices are concerned." Or indeed food, its energy costs are simply there.


Two trick pony economy , property and dairy, not broad based growth at all..never mind...its election year soon ... the third bloody  sucker will be the banking sector wishing the first increase in the OCR asap... movements in ocr up will allow them even more room to play with the margin.

speckles - please explain why you think banks want OCR hikes ?

because the rate they lend at isnt the OCR rate, hence they want to avoid the political flak.

Steven - are they mean't to, how could they lend at the OCR ?   Please explain

"Borrow" at I meant.  They lend at the rate they borrow at plus a margin.  If the OCR is a lot lower than their borrowing rate they look bad.

ZZ - rather than continually talking generalities on this subject, tell me what are their actual margins that THEY are making above OCR ?  Give me a ball park, show me that your not talking uninformed hot air because youre sounding pretty consisent with this theme that tells me you are

ZZ - when someone can't answer a specific simple question it shows that they haven't got a bloody clue and try to hide behind a s criticism of someone for anking that very simple question. Good luck, others may think theres value is discussing interest rates and banks wth you,
Personally I come here to learn something on the subject that I know alot less about than others on here, property would be one where the likes of High and many many others here have a much superior knowledge. But if I'm going to attempt to make bold statements in areas were I'm weak, I'm going to at least try to answer there very simple questions where someone challenges me, and perhaps I learn something from them in doing so...but we're all different.

ZZ - you repeat your ignorance - leave you to it.

Ok ZZ one last try - I don't disagree with that at all, what I disagree with is the conclusions you make in your other postings I.e that banks are the cause of this. Banks are simply the intermediaries between investors and borrowers who take a margin for the work and risk that they incur in doing so. The reason NZ rates are higher on average in the OECD is much more complex but is mainly a reflection of NZers lack of savings that results in NZ banks having  to go externally to fund those borrowings. We pay a price for that through the higher interest rates that investors expect to receive by investing in a small minnow country at the bottom of the world that has run large current account deficits for a long time. That offshore cost benefits local investors as well as they are in a strong position for the demand for their funds I.e. They're getting paid way over OCR 2.50% for their funding by banks as the banks have RBNZ prudential requirements to meet in having retail funding.
The OCR is currently 2.50%, the market trades the bank bill rate at around 15bps above that at 2.65%. The banks have to pay a spread above that to  local and offshore borrowers of  around 120-150bps above that. That spot spread is currently lower than that as spreads have fallen with money printing and banks becoming more stable globally, but they still have plenty of borrowings that make up that 120-150bps that they took back in the crisis in 2008-2011 when they were forced to lock in 200 plus funding for anywhere from 3-7 yrs typically - that will disapated slowly over time. So with floating mortgage rates still available at around 5.40%, their current margins are roughly around 130bps by my calculation.
How's that compare globally - US 30 day CDs are about 15bps, US Mortgages rates about 325bos.......pretty favourably I suggest.

Agree, I'll add that I suspect most economists dont see debt as an issue as one man's debt is anothers credit....the problem is the model economists are using is too simple, its not equilibrium.   Steve Keen/Minsky explains it well IMHO.

speckles - please explain why you think banks want OCR hikes ?

scare people into locking into higher margin fixed terms

scare people into locking into higher margin fixed terms

Cowboy - banks don't make more money with fixed rates, in fact their margins are slightly fatter with floating borrowers. The ones that do make more money when rates go up are the investors, either local or offshore, who are funding the banks and receiving the income. In fact banks prefer low rates where their customers are doing plenty of business, and aren't stressed out by higher rates and risk incurring lending losses for the bank. You just have to be careful of the popular misconception permeated by one or two on here who don't understand banking or interest rates.

Banks prefer low rates? depends on low I suppose but no they dont like it this low, they have said so.
Funny how you attack others on here whose opinions you odnt like when in fact yours are strange to say the least.
That's austrian economics I suppose.

Steven let's try and be clear about what I don't like, I don't like people you state opinions that they won't back up with facts when others such as me query them with simple questions - there are a couple on here who are incapable of actually providing that and simple shoot the messenger.
Lets see about you. I have never heard a bank state that they don't like low interest rates. I may have missed something along the way, and are happy to learn something I didn't know, but from my knowledge of banking that is completely foreign to me. So I ask you for some example/evidence/logic as to why that is the case. If you wish to join those other one or two, you will either ignore the request, come but shooting the questioner, or more often than not, change the subject or slant it to mean some on a higher level to indicate that you don't have the specific answer. You may have it in this case, so happy to learn. Also to complete that learning, please be specific as to how my opinions are strange...specific is specific.

I think it was a bank CEO interviewed? in here? who said the banks followed the OCR no matter (within reason Im sure)  what their funding rate was.  So when rates went up the banks blamed the RB and followed, even if their fnding had not increased.  the RB took the flak, but when the OCR drops and drops a lot the banks take the flak. So the CEO stated now however that as the OCR had got so low their funding simply wont go that low.
What's interesting is that because we dont have enough domestic savers and the banks have to borrow overseas that keeps the deposit rates up (or helps to) I suspect.  eg Japan with their massive savings rate gets virtually no interest.
Now really you have a very specific economic viewpoint, it wold seem to be the freshwater school shall we say, that greatly differs to my one, and sure I go "higher level" because that overview is what is important.
Its known as not being able to see the woods for the trees. Or knowing finance backwards when the question is economics is the wrong speciality to worry about.
"Come out shooting", funny but you seem to be a classic on that, hence I pull you up on it.
ZZ for instance when he's not throwing his property vested interest moment has some interesting and succinct views....
Forget counting trees, stand further back.

Steven - based upon that post of yours in insolation, I don't see us disagreeing on much. I didn't see the interview but I can well understand the point the bank CEO is making. When OCR rates fall e.g. 2008/09 style, there is a level to which investors/savers won't permit bank despit rates to fall to without withdrawing funds, hence banks funding costs at 4% plus when the OCR is at 2.50%. And banks lend at a level above their cost of funds, not some rate set by the RBNZ. But when the OCR rises, and banks take rates higher as the RBNZ expects, the investor/despitors unsurprisingly have no issue with the banks raising heir rate across both borrowinf and lending.
And yes countries saving rates tend to set the overall level of interest rates on average and NZ's has been horrendus, although improving. This fact is something not reconised by a very few on here who love to quote for instance US, Singaporean, european lending rate levels as appropriate for NZ - approriate? tell that to NZ and offshore depositer into mthe NZ market. We have a long way to go to "earn" those rates.
Big picture ?   I don't see anything you say that is "big picture" outside of what we discussed. Its simple maths when you discuss what my original posting was about..banks and economists don't set NZ interest rates, investors do. All they control is their interest margins and these are in many cases modest in comparision to many who are in deep do dos and being bailed out by fat margin business being presented to them by their central banks to get them solvent.

A little Table for the Edification of the Masses:  Stats NZ kindly does 'em online.
Key Statistics Table 7.01 - Value of exports - by HS chapter group - SD (Annual-Jun)



Live Animals, Meat and Edible Meat Offal - HS Chapters 01-02


Fish, Crustaceans, Molluscs, Dairy Produce and Other Animal Products - HS Chapters 03-05


Vegetables, Fruit and Prepared Foodstuffs, Beverages and Tobacco - HS Chapters 06-24


Minerals, Chemicals, Plastic Materials and their Products - HS Chapters 25-40


Manufactures and Goods Classified by Material (excluding Metals) - HS Chapters 41-71


Metals and Articles of Metal - HS Chapters 72-83


Other - HS Chapters 84-98


So, rather than a two-trick outfit, we do seem to have a nice balance between:
Agri - say 19 b
Horti - say 7 b
Oil, minerals say 5 b
Manufactures/metals say 9b
And the inevitable Other say 5b
So Primary exports say 26b, Rest say 19b.
Doesn't feel all that single-trick to me....facts trump speckulation every time.
[ Oh, dear, Interest.  The table above is nice html, standard tags, renders as table in editor.  But not in comments..Gaaah!  Must Do Better!]

Ok to be clear - concerning the growth/recovery re GDP it is clearly two sectors..if you are so good at stats have a real look.:-)  Suspect you already knew that.

Waymad - No amount of facts will move doomsters from their gloom. Casting bucket loads of pearls before swine does not make them more than bacon and chops.
No matter how hard I convinced myself my cat could learn algebra, x always = meow.
(Coincidentally in younger days i had a cat named Speckles.)

Snodgrass - please have sympathy, its a very hard time for the doom and gloomers on here at the moment - theyve getting progressively more miserable as things have picked up. They will have their time in the sun again soon, but I'm afraid for the monent  its spoiling their Christmas', and we should be cognisant of that.

Yeah, I noticed that comment "... the reduced RISK of rate cuts by ..."

where's the movie values

These Westpac economists must have been interviewed after a 6 hour Christmas lunch - surely!

ZZ - since bank economists have absolutely zilch to do with where interest rates go, can I suggest that if youre going to write humour make it more obvious to those that may think you actually being serious