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David Hargreaves catches up on the things he missed during an extended summer break and concludes that 2022 is looking a lot like 2021 - but worse

Opinion by David Hargreaves


After the relatively smooth run we had with economic conditions globally, I suppose it was inevitable something would come along to spoil it.

And first up it was something new - a 'novel' virus.

Now though we are seeing some decidedly 'not novel' factors coming on to the scene. Not 'novel' perhaps - but not seen for a long time either.

The return of initially one 'old villain' - the almost forgotten inflation monster - has now been followed by a re-acquaintance with another old villain - namely war. It's not clear yet whether this will be 'hot' or 'cold' war, but either way, between this and inflation these factors could collectively dominate the immediate economic future.

It's around 30 years or more since many of us have had cause to much think about or worry about either inflation or armed conflict. Now we have both of them back in the frame and the second one (the conflict) is likely to act as an accelerant for the first one (the inflation).

After two whole months on summer break I've been scrabbling to catch up on my background reading. One of the things that caught my eye was a piece from independent economic researchers Capital Economics regarding the Russia-Ukraine crisis. Capital senior global economist Simon MacAdam calculates that a Russian invasion of Ukraine or severe ratcheting up of sanctions would add "as much as" 2 percentage points to inflation in developed markets, particularly in Europe.

"In normal times, [developed market] central banks would ‘look through’ such a jump in inflation. But currently, this would be one of a long litany of inflation shocks that have conspired to push inflation already well above targets. So, we think that policymakers would be forced to tighten policy more than they otherwise would," MacAdam says.

Which is all pretty interesting, because it comes on top of already surging inflationary pressures that have been kicked off in large part by supply problems. And clearly any actual conflict or alternatively development of a new cold war (or combination of both) will see those supply problems made worse.

Either way you look at it, I think the portents are not good for the world being able to push the inflation genie back in the bottle any time soon.

And we here in NZ of course will not be immune to all this.

We have already clocked a three-decades high annual inflation rate of 5.9% as of the December quarter. Economists are suggesting inflation may peak at around 6.5% in the March, 2022 quarter. But bear in mind that economists' forecasts both in terms of how high inflation will go and for how long it will remain elevated have been going steadily up and up in recent months (as actual inflation has continued to blow forecasts out of the water).

Any additional inflationary stresses due to geopolitical risks will come on top of the considerable inflationary issues our Reserve Bank is already facing up. Already the assumption is it will raise the Official Cash Rate again at its next review on Wednesday, February 23, probably to 1.0% (from 0.75% currently). There's an emerging view that the RBNZ may hike the OCR at each of its seven reviews this year - which would take the OCR to 2.5% by the end of this year.

What would mortgage rates be looking like if that happened? Well, it's not as easy to answer that as you might want to think. It would not be a question of simply adding the extra 175 basis points added to the OCR on to average mortgage rates. Remember, the banks have been very much front-running anticipated rises in the OCR with their own mortgage rate hikes.

The RBNZ's monthly average mortgage rate figures show that as of June last year the average two-year fixed 'special' mortgage rate was a little under 2.6%. As of January 2022 the average rate had jumped to 4.25%.

The last time the OCR was at 2.5% was just over six years ago. At that time, according to our records here at (and I'm talking end of January 2016) the average two-year fixed rate among the major lenders was a touch under 4.5%.

So, yes, the last time the OCR was as high as folks say it might get by the end of this year (IE 175 basis points higher than now), a two-year mortgage rate was only 25 basis points higher than the rates are already.

Now, I'm just guessing, but with the 'lead' the bank mortgage rates already have over the OCR I suspect we will see mortgage rates push rather higher than they were in 2016 if the OCR does hit 2.5% by the end of this year. Surely popular rates such as the two-year will go past 5%. Will they even go to 6%?

What levels of mortgage rates will the market - and more to the point the borrowers - be able to bear given the stupendous size of some of the mortgages we now see out there? There's the real question. And I'm sure that's a question the RBNZ would like to know the answer to as well. But the central bank will be concerned about the impact of its OCR hikes.

According to RBNZ monthly figures, in January 2016 the average sized new mortgage taken out that month was $167,000. In December 2021 (latest month available), the average-sized mortgage was $394,000.

The calculator suggests that $167,000 taken out for 30 years on an interest rate of 4.5% (the average as of January 2016) would cost $846 a month to service. A mortgage of $394,000 taken out in January 2022 at 4.25% would be costing $1938 a month. Some fortunate people might have more than doubled their wages since 2016, but they would be in a minority.

The reality is things may already be getting tough, or about to get tough for recent homebuyers.

To quote Capital Economics again - they are already picking that there will be a 10% "peak to trough" fall in house prices in NZ by the middle of next year and that this will force the RBNZ to start cutting rates from the middle of 2023.

Falling house prices? Well, certainly the latest REINZ figures give substance to the anecdotal evidence of late last year that the housing market was coming to an abrupt halt.

How will this significant cooling of the housing market affect how people spend, particularly as we've now got Omicron circling in ever-wider circles?

The bad news is that that any significant drop-off in spending from here is not likely to have much of an immediate dampener on inflation. And the pressure for higher wages is continuing to build, which will of course also feed into more inflation.

Between Omicron disruptions, geopolitical risks and 'how high will it get?' inflation, this is looking like a strap-yourself-in kind of year. Just what we needed after the last two years...

This editorial column was originally published on and has been republished here with permission.