Traders in financial markets didn’t buy the tough talk. Meanwhile, most New Zealand bank economists forecast the first OCR cut occurring in November this year or February next year.
Commentary the RBNZ released yesterday, supporting its decision to keep the OCR at 5.5%, took a notable turn.
The RBNZ recognised monetary policy would need to “remain restrictive” but said the extent of this would be “tempered over time consistent with the expected decline in inflation pressures”.
The RBNZ put quite a bit of emphasis on the strain the economy was under.
It even said there was a risk the high OCR was dampening economic demand more than it expected.
This was a noteworthy comment that suggested its May forecasts, due to be updated in August, were stale.
The RBNZ’s commentary saw bank economists lean more towards November for the first rate cut.
Meanwhile, it gave traders in financial markets the evidence they were looking for to support their views that OCR cuts were imminent.
So, within seven weeks, the RBNZ has gone from being “surprisingly hawkish” to “surprisingly dovish”.
It’s gone from seeing the risks more heavily skewed towards inflation being worse than expected, to the risks being more balanced.
Central bank observers are likely to welcome the change, as they saw the RBNZ’s May outlook as unrealistic, or possibly just jawboning aimed at preventing markets from getting ahead of themselves.
Equally, those questioning whether the medicine being used to treat inflation is now causing more harm than the disease itself will feel more seen by the RBNZ than they were in May.
Interestingly, the RBNZ’s change of sentiment occurred without it receiving updated inflation figures.
It reviewed the OCR both yesterday and in May knowing the annual inflation rate fell to 4% in the March quarter. Stats NZ will only publish June quarter figures on Wednesday.
This data release will be one to watch. If it shows inflation falling by more than expected by the RBNZ, it could give retail banks the confidence to lower their mortgage and term deposit rates a little – if they haven’t already by then.
While markets have for some time been pricing in OCR cuts for this year, yesterday’s statement gave them reason to price in even more aggressive reductions.
Banks don’t shift their retail interest rates with every move in wholesale rates. But if they see the move sticking, they could lower their mortgage and term deposit rates accordingly.
Competition will also be a key factor.
Demand for mortgages has been weak, so there’s a case for banks to offer attractive rates to drum up business.
Indeed, the portion of new mortgage lending to those who have changed bank has trended up significantly over the past two years, as high interest rates have prompted borrowers to shop around.
Nonetheless, the RBNZ is of the view bank funding costs remain elevated enough to limit the amount banks can cut their retail rates by. For example, banks have to pay more now than they did during the pandemic to get funding from wholesale markets and depositors.
It was always going to be difficult for the RBNZ to decide when to start easing very tight monetary conditions.
The fact markets believe there’s a chance the OCR could be cut as early as August 2024, while the RBNZ only seven weeks ago suggested it would wait until August 2025, underlines the uncertainty people trying to make financial decisions face.
For now, it’s probably safe to say the monetary policy ship really is turning and could deliver some goods before the end of the year.
But as history has shown, this view may well be redundant by next month, or even next week, when the latest inflation figures are out.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
