AND WE HAVE LIFT OFF
Mark Lister, 6 October 2021
As expected, the Reserve Bank of New Zealand (RBNZ) increased the Official Cash Rate (OCR) from the record low of 0.25 per cent, where it has been since March 2020, to 0.50 per cent. This was the first increase since 2014, so it's been a long time between drinks.
The next RBNZ decision is in late November and this will also see the release of a fresh set of economic and financial projections. We should get a lot more information at that time, as well as some important insights into how the RBNZ sees the lingering effects of the lockdowns, and how capacity pressures across the economy have altered its inflation expectations.
Markets expect another 0.25 per cent hike in November, which would see the OCR end the year at 0.75 per cent, and it is seen at around 1.50 or 1.75 per cent this time next year.
The RBNZ acknowledged the difficulty that many businesses (particularly in Auckland) have endured amidst the recent restrictions, although it seems to see much more good than bad on the economic front.
It pointed to strong business and household balance sheets, ongoing fiscal support, and a strong terms of trade as reasons to believe that activity will recover quickly when restrictions are eased.
Investors needn’t panic over today’s interest rate rise, and it’s important to remember why we’re talking about a gradual return to more normal monetary policy settings in the first place.
Economic growth has been buoyant, commodity prices are solid, the labour market is tight and confidence is high. That’s a supportive environment for businesses, provided the current restrictions don’t remain in place too long.
However, share investors should still take note, and ensure portfolios include companies with pricing power, defensive attributes, and growth options.
Without the falling interest rate tailwind, we can’t simply count on the rising tide of valuations, which means those that can genuinely grow earnings over the next few years could perform best.
Periods of rising interest rates are usually bad news for fixed income and bonds, although that doesn't mean these important assets should be ignored.
In fact, a modest rise in interest rates would be a silver lining for many conservative New Zealand savers, as reinvestment opportunities become increasingly attractive.
In terms of the housing market, we have already seen mortgage rates increase in anticipation of looming OCR hikes. As an example, the one-year mortgage rate is around 0.60 per cent higher than where it was in June.
However, higher interest rates could still create a headwind for property prices, as mortgage rates rise for existing homeowners and buyers cannot borrow quite as much as before.
With some three quarters of mortgages due to reprice within one year, some homeowners could also be in for a shock when they visit the bank manager to lock in a new rate, especially those who are heavily indebted.
Let’s be honest. It wouldn’t be a bad thing at all if the housing market took a breather, despite the negative impact this could have on confidence, consumer spending and economic activity.
Turning to shares, we believe the outlook should remain positive. While it won’t always be smooth, economic activity and corporate earnings are likely to improve over the balance of the year and into 2022, across most parts of the world.
We’re also witnessing a significant decline in new daily cases of the delta variant globally, which should allow economic activity to pick up in the months ahead, boosting sentiment. The JPMorgan Global Composite PMI pointed to an encouraging increase in activity in September, the first time since May.
For the most part, we don’t believe investors should change tack in the wake of today’s OCR hike. Change, uncertainty and shifting market conditions are the norm for financial markets, and while these can be unnerving at times, it also provides opportunities for those who are able to maintain their nerve, stick to their plan, and focus on the long game.
As always, periods of change are an excellent opportunity to touch base with your adviser, and ensure you have an all-weather portfolio that will prove resilient against a range of market conditions.