The market tempered its expectations following the release of the RBNZ’s statement, but there continues to be a gaping hole between what the RBNZ says it might do and what traders in financial markets believe it will do.
Most bank economists can’t see the RBNZ hiking the OCR again and reckon it will cut the rate early next year.
Why the differing outlooks?
RBNZ Governor Adrian Orr, in a press conference, blew off an economist’s suggestion the RBNZ’s statement was a “calculated bluff”, or jawboning exercise aimed at preventing markets from prematurely cutting rates.
While headline inflation is tracking down, with the annual figure falling to 4 per cent in the March quarter, the RBNZ is worried interest rate hikes haven’t done much to slow rises in rents, insurance premiums and council rates.
Non-tradeable inflation, which captures these prices, rose by 5.8 per cent in the year to the March quarter.
The RBNZ also wants to avoid an inflation spiral, where businesses keep lifting their prices aggressively and employees keep requesting hefty wage/salary hikes to keep up with rising living costs.
Furthermore, it’s wary the Government’s promised tax cuts risk exacerbating inflation.
It’s waiting for the Budget to be delivered on May 30 to understand the extent to which new expenditure (including on tax cuts) will be paid for by savings and new revenue measures, rather than debt.
The RBNZ is cognisant the timing of the Government’s tax-and-spend plans is a factor to consider when weighing their impact on inflation.
Bank economists recognise the RBNZ’s concerns but believe high interest rates are taking the wind out of the economy’s sails and inflation will be low enough to enable the RBNZ to cut the OCR by early next year.
Some commentators believe keeping the OCR at 5.5 per cent until mid to late-2025 would obliterate any remaining signs of life in the economy.
Taking a step back, HSBC economist Paul Bloxham points out that the disconnect between the RBNZ and the market isn’t new or unusual.
“We note that in all the cycles over the past 25 years the cash rate has been cut earlier than the RBNZ had been projecting,” he said.
“For example, prior to the RBNZ starting its cutting cycle in June 2015, it had been forecasting a cash rate on hold over the projection horizon. In March 2011 and March 2003, prior to the RBNZ cutting, it was forecasting cash rate hikes.”
Once the RBNZ starts loosening monetary conditions (whenever this may be), its projections suggest it sees itself moving quickly, taking the OCR to around 3.7 per cent by the end of 2026.
Where does leave those with mortgages?
If the RBNZ keeps the OCR at 5.5 per cent until September next year, many borrowers will be caught short when they come to refix their loans.
RBNZ data shows borrowers have for some time been betting on the OCR falling soon.
Since the start of last year, fixing for a year has been the most common option for those with mortgages.
The popularity of one-year mortgages has taken off since the start of this year, while fixing for six months has become more common at the cost of two-year mortgages.
While mortgage and term deposit rates are influenced by a range of factors beyond the OCR, all eyes will be on whether banks keep making little cuts to their rates, or take the RBNZ’s message on board and hold fire for a bit.
Jenee 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.
