Reserve Bank lifts OCR to 5.5 per cent but shocks market by saying it’s done enough

The Reserve Bank (RBNZ) has today raised the Official Cash Rate (OCR) by 25 basis points - taking it to 5.5 per cent.

The RBNZ said it still sees 5.5 per cent as the peak for OCR. It anticipates cuts from the third quarter of 2024.

That call surprised markets with its softer, more “dovish” approach.

The big turn in immigration numbers and last week’s Budget had shifted market forecasts drastically since the last OCR decision in April.

Where previously, a rate hike to 5.5 per cent this month was expected to be the peak for the cycle, there were growing expectations we’d see the rate move as high as 6 per cent.

The Reserve Bank’s decision to hike the rate by 25 basis points, while largely in line with expectations, unleashed a “crazy” response in the nation’s dealing rooms, as it was far more dovish than expected.

Soon after the 2pm, release, the New Zealand dollar was down by three-quarters of a US cent and wholesale interest rates were off sharply.

The big surprise was that the bank had called the peak in the OCR at 5.5 per cent.

”It’s crazy, as you would expect,” Westpac senior market strategist Imre Speizer said.

”It’s a very dovish surprise in the OCR track. The 25 basis point hike was not a surprise - that was fine.

”It was the retention of the 5.5 per cent forecast peak.”

”In other words, they are signalling that they have completed the cycle. It’s over. And that was a major surprise for the market as most had expected more rate hikes to come.”

By mid-afternoon, the New Zealand dollar was down at US61.85c from US62.48c just before the release.

In the interest rate markets, the response was huge. The two year swap rate fell sharply to 5.19 per cent from 5.55 per cent while 10 year swap rate was at 4.37 per cent from 4.53.

In bonds, two-year Government yields fell to 4.79 per cent from 5.13 per cent and 10 year bonds were at 4.30 per cent from 4.45 per cent.

That should all add up to downward pressure on fixed rates - good news for mortgage holders.

The RBNZ said inflation was easing from its peak. “Consumer spending growth had eased and residential construction activity had declined.”

House prices had returned to more sustainable levels, the RBNZ 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.”

Prior to today’s decision, there were growing expectations that the rate could move as high as 6 per cent.

“Members discussed the impact of Budget 2023. Fiscal policy is projected to add to demand over the 2023/24 fiscal year, then dampen demand in subsequent years,” the RBNZ 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. Government investment is expected to continue to grow, in part due to the repair and rebuild work in the aftermath of the weather events. Fiscal policy is projected to be less contractionary than the Committee had assumed in February.”

The Monetary Policy Committee also discussed the impact of the recent surge in immigration.

“The committee expects the pace of immigration to ease back toward pre-Covid-19 trend levels over coming quarters,” the RBNZ said.

“While immigration has assisted to ease labour shortages, its net impact on overall spending is uncertain. The recent recovery in tourism spending, to around three-quarters of its pre-Covid-19 trend level, is also supporting demand.”

Following the decision, ASB was the first major bank to lift its interest rates.

Its Housing Variable rate will move from 8.39 per cent to 8.64 per cent while the Orbit home loan rate will move from 8.49 per cent to 8.74 per cent.

National’s Finance spokeswoman Nicola Willis attacked Labour’s “mismanagement of the economy” after the RBNZ’s announcement.

“This latest interest rate hike may have been avoided if the Government had been more disciplined with its own spending and done more to take pressure off inflation,” she said.

“Instead, Labour’s mismanagement of the economy has delivered New Zealanders the toxic trio of high inflation, rising interest rates and looming recession.”

Willis said Finance Minister Grant Robertson’s Budget last week only poured more fuel on the fire.

“It was obvious there would be costs from the rebuild of the East Coast and Hawkes’ Bay. Those should have increased the pressure to find savings, particularly in the back-office bureaucracy in Wellington.

“Instead, Robertson once again broke his own spending limit. It has become such a problem that Treasury was driven to comment in the Budget that ‘[over] the last five years, the operating Budget packages have been, on average, $0.6 billion per annum higher than the allowances signalled in the Government’s Budget Policy Statement.’”

Act Party leader David Seymour said today’s OCR rise would “hit Kiwis hard”.

“As the Reserve Bank says, fiscal pressure will drop away eventually but not now. In the meantime, the ASB is straight out the gate with increased floating rates and other banks are sure to follow.

“The Reserve Bank admits to being surprised at the increased government spending. Even if you’re lucky enough to get the goodies from last week’s budget, any benefits will be eaten up by inflation and interest rate increases in no time. If you didn’t get the goodies, it’s higher prices and higher government debt for you.

“This OCR increase, and the impact it will have on the wider economy, will undermine all the benefits of last week’s Government giveaway. For the vast majority of Kiwis it’s just inflation all the way, with no end in sight.”