The Reserve Bank is predicting as a result of the economy’s pace of growth going from -0.5% in the year to September 2025 to 2.8% in the year to March 2027 then 3.1% the year after, the inflation rate will fall from 3% to 2.2% then 2%.
That is what the markets have priced in, Alexander says.
However, the new Reserve Bank Governor Dr Anna Bremen has tried to push back against that expectation – with understandably minimal success in terms of levels of wholesale interest rates.
“Her actions are significant. They tell us that the theory of the central bank continuing its past policy tendency is probably valid.
“That past tendency is to tighten too late then tighten too much, then to ease too late and to ease too much.”
Alexander says the chances are good that despite growing signs of heightening inflation risks through this year, the central bank won’t attempt to stem the upward pressure on the inflation rate until 2027.
But it is quite risky to take strong positions on monetary policy changes more than three months out, he says.
“So be prepared for some big shifts in policy forecasts through the year. After all, nothing has suddenly changed in the world to deliver greater forecasting accuracy now than has been the case in recent years.”
Throughout last year Alexander highlighted risks to inflation and interest rates and encouraged people to actively consider fixing in the 3-5 year period rather than rolling over at one year as so many have done in recent years – to their cost two years ago.
“Those inflation risks remain and the chances of accelerating growth producing lower inflation are very low.”
He says that is why he strongly noted for much of late last year that if he were borrowing, he would fix five years at 4.99%.
Now, all the main bank 3-5 year fixed mortgage rates have gone up, and the best five year rate is around 5.25%. Would I still take it?
I would say yes if all fixed rates were at 5.25%. But people can still fix one year about 4.5% and that means there is a big cost in the next year to fixing long.
“So, if borrowing at the moment I would probably opt instead to fix for three years at about 5.1%.
“Most people won’t, again because the jump from 4.5% is too great.”
Alexander says the opportunity to fix long at a good rate has been and gone again and the question becomes one of how quickly short rates will rise.
“That depends upon how quickly we see signs of the cyclical acceleration in the pace of consumer price rises appearing.”
He says the economy has good levels of spare capacity. The Reserve Bank strongly focuses on loose conditions in the labour market where the unemployment rate is at 5.3%, which is about as high as it gets each cycle these days.
“It predicts the rate will still be 5.3% in March this year then decline only to 4.8% come March 2027 and 4.5% March 2028.
“All of those numbers look too high, especially when we consider the high level of hiring intentions from the ANZ’s Business Outlook survey.
Alexander says that, coupled with the net proportion of businesses planning to raise their prices running at twice the three decade average, tells us that risks for inflation and interest rates lie firmly on the upside.
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