Inflation challenge to bank’s interest rates call

Home-loan borrowers may have felt a spark of hope at news that ANZ’s economics team now expects the official cash rate to drop to 1 per cent by 2020.

At present it sits at 1.75 per cent, already an all-time low.

Mortgage rates have lifted slightly in recent weeks but are also cheap by historical standards. The median floating rate across the market is now 5.89 per cent, for one year it’s 4.55 per cent and two years 4.69 per cent.

Infometrics chief forecaster Gareth Kiernan was not convinced by the ANZ prediction.

‘‘They are putting a lot of weight on concerns about global growth, and downplaying the inflationary risks associated with the tight labour market and squeezed business profitability,’’ he said.

‘‘Weighing up the net effects of those conflicting influences on the outlook for the official cash rate is, of course, a matter of judgment, and we believe that the inflationary risk is more important at this stage – although we’re not picking rate rises to start until early 2020. If the global growth risks do materialise, I’d think the bank would need to be cutting before the end of next year.’’

Satish Ranchhod, at Westpac, said he expected the cash rate to remain on hold until 2020.

The pick-up in inflation was contained enough not to require a cash rate hike, he said, and the economy was ticking along to the extent where a rate cut was not needed.

The Reserve Bank itself has said an increase in late 2020 is the most likely scenario.

Either way, no one was sure that a drop in interest rates would mean much cheaper mortgages.

BNZ chief economist Tony Alexander said some decline in retail interest rates would be expected if the cash rate moved, but that would be influenced by overseas bank funding costs, and the proposal to require New Zealand banks to hold more capital. That is predicted to increase the cost of borrowing.