With no one expecting an official cash rate move, all the debate before today’s Monetary Policy Statement was about whether the Reserve Bank of New Zealand would bend its forecasts to meet the market expectation of rate cuts next year.
In fact, if anything, the central bank took a tougher stance on inflation. It has priced in the possibility of one more rate hike in 2024.
The RBNZ left the OCR on hold at 5.5 per cent, and it published a future rate track that suggested no cuts (to below that level) until the middle of 2025.
The Kiwi dollar gained about half a US cent on the news, and wholesale markets repriced the cost of debt. Following the announcement, the two-year swap rate rose by 13 basis points while the 10-year swap gained six basis points.
Mortgage holders looking for lower rates the next time they fix will need to put their hopes on hold for a while.
In the battle to get inflation back down below 3 per cent, the hawkish tone makes perfect sense. It sends a message which moves markets and prevents banks from getting ahead of themselves.
Westpac recently cut its two-year fixed mortgage rates, although it shifted its one-year rates higher.
But big questions remain about how realistic it is. Will rates really stay on hold for another 18 months? How much of today’s tone was about part of a strategic pushback against the market over-exuberance?
Singapore-based Capital Economics wasn’t buying the hard line.
“While the RBNZ signalled that it could hike rates further, we still think that the tightening cycle is now over and that the bank’s next move will be a rate cut in the second half of next year,” said Marcel Thieliant, head of Asia-Pacific.
Thieliant said he still expected GDP to contract across the second half of the year, “which should convince the bank that further tightening won’t be needed”.
In contrast, the RBNZ’s forecast no longer sees New Zealand’s economy going into recession in this economic cycle - albeit with a close shave (zero per cent growth in the December quarter and just 0.1 in the March quarter).
And with inflation returning to the bank’s target band by the second half of next year, “we expect the bank to start cutting interest rates in [the third quarter of] 2024,” Thieliant said.
Regardless, RBNZ governor Adrian Orr seemed concerned about overly wishful thinking from investors and markets undermining the impact of tighter policy.
“What you’re hearing is the market wanting to hear something about cutting and jumping on that more than they are on news about holding,” Orr said when asked about speculation around impending rate cuts in the US.
The Monetary Policy Statement also expressed concern about inflation remaining sticky as high net migration boosts economic demand and a stabilising housing market brings the “wealth effect” back into play for consumers.
It noted net immigration had been higher than previously assumed - a record 118,000 population increase in the year to September.
This had increased the supply of workers into a tight labour market and helped to ease some wage pressure.
“However, the demand side effects were now becoming apparent,” the committee said.
Strong population growth had contributed to an increase in housing rents. Rent increases, and any increases in construction costs in response to greater housing requirements, affect inflation directly, as rental prices and construction costs are accounted for in the consumer price index, the committee said.
House prices had stabilised after earlier declines, with strong population growth and increased nominal disposable incomes offsetting the effect of higher debt servicing costs. House price increases affect inflationary pressures indirectly, via higher household wealth and an associated increase in consumption, the committee said.
“The hawkish tilt comes despite recent data that on balance has gone the RBNZ’s way, particularly the labour market,” said ANZ chief economist Sharon Zollner.
“Part of it may be strategy - talking tough to prevent the market running away with the idea of cuts and thereby easing monetary conditions - but there does appear to be genuine concern that the bulk of the transmission of monetary policy is now in the rear-view mirror and core inflation and inflation expectations have not responded as hoped.”
Westpac chief economist Kelly Eckhold said his first impression was of a Reserve Bank “concerned that further increases in interest rates may be required towards the middle of 2024″.
Migration and housing market indicators over the next few months would be crucial, as would the next couple of consumers price index results.
“The new Government’s fiscal projections in the [fiscal update] before Christmas will also be a key focus,” he said. “OCR cuts certainly do not seem to be on the radar for the RBNZ right now.”
The RBNZ will release its next Monetary Policy Statement in February. Asked about the long summer break, Orr reassured. “Rust never sleeps, and neither does the Monetary Policy Committee,” he said.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.