Stock Takes podcast: Economist calls for Official Cash Rate to stop at 5 per cent

Kiwibank chief economist Jarrod Kerr hopes the interest rate rises will stop. Photo / Fiona Goodall

Economists expect the Reserve Bank to increase the official cash rate by 25 basis points to 5 per cent today.

And Kiwibank chief economist Jarrod Kerr believes they should stop there.

“They have told us they want to lift the cash rate to 5.5 per cent.

“We don’t actually agree with that,” Kerr told the Stock Takes podcast.

“We think it’s a risk that they overtighten here but it’s all about inflation and the Reserve Bank is trying desperately to get inflation back within its target band.”

The consumer price index increased 7.2 per cent in the 12 months to December 2022 following the 7.2 per cent annual increase in the September quarter.

The RBNZ is trying to get it back to within a range of 1 to 3 per cent.

Kerr believes there has already been enough tightening.

“I think the interest rates that are out there at the moment on mortgages and business lending are rates all at very high levels and we are seeing a significant impact on business investment intentions, hiring intentions, their thoughts about profitability all being severely impacted and also households.

“These rate rises are having a big impact on household budgets and that’s feeding through to consumption patterns.”

Kerr said consumer spending had already come off.

“We saw some very weak numbers to end last year. And I think it just proves the rapid rise in interest rates that we have seen are really starting to cool the economy down.”

Kerr said the pace at which the economy expanded last year was a lot less than the Reserve Bank had expected.

Mortgage rates have already risen sharply.

Kerr believes variable rates are likely to increase more if the cash rate rises again next month.

“But I think fixed rates that most Kiwis use are close to a peak, if not have peaked already.”

He said if the Reserve Bank stopped at 5.25 per cent then most of that would already be priced into the current mortgage rates.

Kerr said mortgage rates were high compared to where some made decisions to borrow and where rates were a few years ago.

About half of borrowers have rolled onto the higher rates and so far they are coping. But the big risk is rising unemployment and whether borrowers will continue to be able to pay.

Listen to the full podcast for more on the state of the economy

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