Today’s soft touch from the Reserve Bank of New Zealand (RBNZ) - lifting the OCR by 25 basis points to 5.5 per cent but calling that the peak - could be good news for mortgage holders... the ones that have already re-fixed, at least!
After assessing the impact of the cyclone rebuild, a surge in net migration and last week’s Budget, the RBNZ monetary policy committee has decided it has done enough to beat inflation.
It says it will leave the OCR at its current level for at least a year - allowing time for the remaining 25 per cent of mortgage holders who are still to re-fix on higher rates to feel the pain.
But it has pushed back on market expectations that another one or even two hikes were needed.
That means today’s decision fell short of the expectations that markets and banks had already priced in.
“It would now be very surprising to see short-term mortgage rates change much, if at all, as a direct response to today’s OCR shift itself, as this has largely been priced in,” said Core Logic NZ chief property economist Kelvin Davidson.
“Indeed, with no change to the forecast peak, market pricing may actually come back a little,” he said.
Prior to today’s decision, there were growing expectations the rate could move as high as 5.75 per cent or 6 per cent.
“The RBNZ may have quashed those expectations,” Davidson said.
At the press conference today, Governor Adrian Orr said he didn’t expect to see any movement in fixed mortgage rates.
“We anticipate none, in the sense that what we are doing today is what we’re foreshadowing for some time,” he said.
He said he would still like to see bank deposit rates rise.
Orr outlined a number of areas where the RBNZ saw inflationary pressure starting to ease.
“Consumer spending growth had eased and residential construction activity had declined.”
House prices had returned to more sustainable levels, he said.
“More generally, businesses are reporting slower demand for their goods and services and weak investment intentions. Businesses report that a lack of demand, rather than labour shortages, is now the main constraint on activity.”
Orr noted that he was pleased to be talking through a set of statistics that suggested economic demand was cooling and monetary policy was doing its job.
He rejected suggestions that the recent Budget was stimulatory.
“Fiscal policy is projected to be less contractionary than the Committee had assumed in February,” he said.
“Overall, fiscal policy will be contractionary on demand over the projection horizon. This reflects that Government consumption, which is the larger share of Government spending, is expected to fall as a share of GDP in coming years.”
While the dovish outlook may be a relief for mortgage holders, not all economists are convinced the RBNZ had called it right.
Westpac chief economist Kelly Eckhold - who has forecast the rate will need to hit 6 per cent - warned that the RBNZ was underplaying the inflationary impact of immigration.
“Migration pressures are acknowledged, but the RBNZ takes a sanguine view on their impact on capacity pressures,” Eckhold said.
The judgement of the RBNZ “that the quite significant boost in population growth will quickly reverse and not add to the housing market or inflation pressures” was a key risk, he said.
Westpac now sees the OCR as having peaked in July, but says there is still potential for a 25-point rise in August.
“Should this not eventuate, we anticipate the RBNZ to remain on hold until after the election in October,” Eckhold said.
“By this time, we expect that the housing market and migration pressures will be showing up fairly strongly and require a further adjustment in the OCR to the 5.75-6 per cent range.”