While the central message was not significantly different to February, the new rate track did imply that significant mortgage rate cuts were less likely until 2025, said CoreLogic NZ chief property economist Kelvin Davidson.
“It’s worth noting that the OCR isn’t the only influence on mortgage rates; factors such as bank competition and offshore financing rates also play an important role,” Davidson said.
“But in an environment where OCR cuts appear even more likely now to be a story for 2025 than 2024, something similar seems a sensible assumption for mortgage rates too.”
“As such, conditions look set to remain testing for at least six to nine months for new borrowers, as well as those existing mortgage holders who still need to fully reprice up to current market rates.
“Sales volumes and property values could also remain fairly soft, and even if mortgage rates do start to fall more appreciably in 2025, that’s when the limiting influence of [likely] debt to income restrictions would start to kick in.”
The committee even discussed the possibility of increasing the OCR at this meeting.
But it assessed that, while the near-term balance of risks around inflation was skewed to the upside, there was more confidence that inflation will decline to within the target range over the medium term.
The financial markets took the statement as a hawkish message based on a slight increase in the forecast track for the OCR, the New Zealand dollar rallying by about half a US cent to US61.50c on the news.
”It was definitely a hawkish surprise for the market,” Westpac senior market strategist Imre Speizer said.
”The number one thing was that they increased the OCR forecast by five basis points at the peak, indicating some chance still of a rate hike in this cycle, before they start cutting,” Speizer said.
RBNZ forecasts have the OCR peaking at 5.65 per cent in the fourth quarter this year, from 5.60 per cent in the previous monetary policy statement released in February.
”Pushing it higher tells you that they are more concerned about inflation and they might need things to be restrictive for longer, and the rate cuts will start later,” Speizer said.
There was considerably more concern noted about the strength of service sector inflation, and acknowledgement that some aspects of inflation were not that sensitive to interest rates, said ASB chief economist Nick Tuffley.
“The RBNZ’s inflation forecast is higher over the rest of 2024, barely getting back in the 1-3 per cent target band by the end of 2024,” he said.
“The forecasts show inflation very near the 2 per cent mid-point over the second half of 2025 but not hitting 2 per cent until the first half of 2026, later than in February’s forecasts.”
“We have retained our view that the RBNZ will start cutting the OCR from February 2025, but the risk is later,” he said.
The committee referred to the upcoming Budget.
“The signalled lower government spending is currently and expected to continue contributing to weaker aggregate demand. Any impact of potential changes in the forthcoming Budget to government spending, or private spending due to tax cuts, remains to be assessed,” it said.
Despite the labour market cooling off and unemployment rising, higher dwelling rents, insurance costs, council rates, and other domestic services were cited as drivers of inflation.
The RBNZ said restrictive monetary policy has reduced capacity pressures in the New Zealand economy and lowered consumer price inflation. Annual consumer price inflation is expected to return to within the committee’s 1 to 3 per cent target range by the end of 2024.
Liam Dann is business editor-at-large for the NZ Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.
