“Instead, the bank’s new line is that policy will need to remain restrictive but that ‘the extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures’.”
Key two-year swap rates, which can influence home mortgage rates, dropped by 13 basis points (bps) to 4.68% on the back of the announcement.
Markets are now effectively pricing in an initial 25-basis-point cut in October, with a second in November.
The New Zealand dollar dropped by about half an Australian cent to A90.43c on the news.
Local economists – most of whom have been picking the first cut will be needed by November or February – interpreted the language as the beginning of an inevitable pivot away from the RBNZ’s previous tough stance.
“Today’s update suggests that the RBNZ view is converging to our own and we revert back to our prior call that the easing cycle can begin in November,” said BNZ head of research Stephen Toplis.
“That also means both the August and October policy reviews can become live meetings and that is certainly how the market sees things.”
ANZ – which had been forecasting cuts by February – noted that the pivot in tone increased the odds of a November cut.
However, it is holding off on officially changing its forecast until we see full inflation data next Wednesday.
“The clear acknowledgement of emerging downside momentum means the risks around our call for cuts from February skew a little bit more towards November, but at the end of the day the data will decide,” said ANZ chief economist Sharon Zollner.
“We will wait for [second-quarter consumers price index] data next week to firm up our view on rate-cut timing. If the overall vibe of the data is co-operative, the path to a first cut in November will be considerably smoother.”
KiwiBank economists have stuck with November rate cut expectations for several months, looking through the RBNZ’s hawkish tone in May.
“We finally got a noticeable softening in tone,” said KiwiBank chief economist Jarrod Kerr. “It was a welcome shift given the total collapse in business confidence last week. Enough is enough.”
The economy was clearly responding to restrictive monetary policy, he said.
“Economic activity looks likely to contract over [the second quarter] and unemployment is set to rise further. We expect inflation to fall in line, eventually.
“With a softening in language and tone, we, along with all market traders, have grown in confidence that a rate cut should be delivered this year.”
Market pricing had moved to price in a full 60bps of cuts by November, with the first 25bps cut for October, he noted.
“We agree with the market but don’t think the RBNZ will deliver as much as priced. Regardless, it’s good news for most businesses and households.”
Despite the pivot, the long wait would continue for most homeowners and the wider property market, CoreLogic chief economist Kelvin Davidson warned.
“Today’s decision doesn’t really mean too much for housing, and market conditions look set to stay in favour of buyers for a reasonable period (or at least those that can afford and secure the finance),” he said.
“However, there could now just be some light emerging at the end of the mortgage rate tunnel, and although they might not necessarily fall straightaway or particularly quickly, any drops would no doubt be welcomed by borrowers. To be fair, there’s already been a drift lower for rates in the past few months, but OCR cuts would add some impetus.”
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist. He also presents and produces videos and podcasts and is the author of the best-selling book BBQ Economics. He joined the Herald in 2003.
