Latest / Early Edition with Ryan Bridge / Kelly Eckhold: Westpac Chief Economist on the expectation the Official Cash Rate will be hiked

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Kelly Eckhold: Westpac Chief Economist on the expectation the Official Cash Rate will be hiked · Early Edition with Ryan Bridge

• 0:00
  Speaker 1: It is 12 minutes away from 6. OCR day today,
• 0:03
  Speaker 1: almost certain it's going to go up, another by Christmas probably,
• 0:06
  Speaker 1: so we'll go from 2.5% to 2.75%, maybe 3% by
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  Speaker 1: the time we're sitting down for Christmas ham. Markets pricing
• 0:14
  Speaker 1: in near 100% chance of a hike today. Kiwi Bank
• 0:16
  Speaker 1: again saying they shouldn't. Kelly Echol, Westpac chief economist with
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  Speaker 1: me this morning. Kelly, good morning.
• 0:20
  Speaker 2: Good morning.
• 0:22
  Speaker 1: So probably odds on it's going to happen, and there's
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  Speaker 1: not really any surprise about that. Kiwi Bank always seems
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  Speaker 1: to be the one saying, no, they shouldn't.
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  Speaker 2: Yeah, I mean, Jared's had a consistent view, I think,
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  Speaker 2: that interest rates need to stay where they were at 2.25%
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  Speaker 2: most of this year. The Reserve Bank does disagree. They've
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  Speaker 2: made a pretty big shift in their view from the
• 0:46
  Speaker 2: start of the year. thought that they'd maybe be doing
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  Speaker 2: one rate quite by the end of the year, whereas
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  Speaker 2: more recently you would say they're pretty locked into 3%,
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  Speaker 2: maybe 3.25% depending on how the data runs between now
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  Speaker 2: and Christmas.
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  Speaker 1: The policy statement obviously is going to be of interest
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  Speaker 1: to people. Where do you think they will land on
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  Speaker 1: the peak for inflation?
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  Speaker 2: On the peak for inflation, they're probably going to be
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  Speaker 2: saying that where we are is pretty much where it
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  Speaker 2: is because I think they'll still assume that oil and
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  Speaker 2: energy prices will fall from here. So, you know, the
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  Speaker 2: last CPI printed just over 4% and the next forecast
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  Speaker 2: for the next quarter will be somewhere down in the
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  Speaker 2: low to mid threes based off what they were suggesting
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  Speaker 2: at the last policy statement. The key question really is
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  Speaker 2: what is their view on core inflation and how to
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  Speaker 2: How high is it and how quickly is it going
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  Speaker 2: to fall? Because that will really determine what they do
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  Speaker 2: with interest rates next year. As always.
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  Speaker 1: Kelly, what about the bond markets? I was reading a
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  Speaker 1: piece in the Wall Street Journal this morning and they
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  Speaker 1: mentioned the Asian financial crisis of 1997. How worried do
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  Speaker 1: we need to be about the fact that the yields
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  Speaker 1: are going north?
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  Speaker 2: I don't think we have to worry about the Asian
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  Speaker 2: financial crisis type issues at the moment. There's actually some
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  Speaker 2: fairly strong fundamental reasons why bond yields are rising around
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  Speaker 2: the world. First thing is that central banks are actually
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  Speaker 2: looking to put interest rates up. You've basically got the
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  Speaker 2: Federal Reserve that probably expected to raise rates one or
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  Speaker 2: two times. This year now, the Australian Reserve Bank is
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  Speaker 2: also expected to potentially raise rates over the balance of
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  Speaker 2: the year as well. And the Japanese have been raising
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  Speaker 2: rates and are expected to continue to do so as well.
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  Speaker 2: That's why those Japanese 10-year bond yields are back up
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  Speaker 2: to where they were in the mid-90s, which was probably
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  Speaker 2: the last time that their Short-term interest rate was heading
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  Speaker 2: to around current levels as well. There's a lot of
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  Speaker 2: competition for global capital out there. That big AI sector
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  Speaker 2: is really sucking in long-term money now into bond markets.
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  Speaker 2: You've got to fund all the data centres and investments,
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  Speaker 2: and there's competition for capital. So it's really just lots
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  Speaker 2: of borrowers, not very many lenders right now in those
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  Speaker 2: long-term markets.
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  Speaker 1: And what about oil? As the price of oil goes up,
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  Speaker 1: do investors demand higher returns because of inflation?
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  Speaker 2: Yeah, so that has been one of the realisations as
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  Speaker 2: we've gone through the year is that this problem in
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  Speaker 2: the Middle East is not going to go away. This
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  Speaker 2: morning we've got the American shooting again, Brent crude is
• 3:24
  Speaker 2: back in the mid-90s. All of the jet fuel and
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  Speaker 2: diesel and petrol prices are not far off the highs
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  Speaker 2: that they were back in April. It basically says that
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  Speaker 2: even though sales of the Reserve Bank may assume that
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  Speaker 2: energy prices will come off, It may be a long
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  Speaker 2: time coming, and as a result, inflation could get stuck
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  Speaker 2: in the threes for a good long while. And if
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  Speaker 2: you've got interest rates in the threes, in the case
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  Speaker 2: of New Zealand, you can't have interest rates. Sorry, if
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  Speaker 2: you've got inflation in the threes, you can't have interest
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  Speaker 2: rates in the twos. You probably need to have interest
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  Speaker 2: rates in the threes, and in some countries, maybe in
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  Speaker 2: the fours.
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  Speaker 1: Kelly, you're called Westpac Chief Economist. For more from Early
• 4:04
  Speaker 1: Edition with Ryan Bridge, listen live to News Talk ZB
• 4:08
  Speaker 1: from 5 a.m. weekdays or follow the podcast on iHeartRadio.