1. Watch what I say, not what I do
Last week the Reserve Bank surprised nobody by keeping the Official Cash Rate (OCR) unchanged at 5.5%, where it’s been since May last year. But it was the language used in the associated (very brief) written statement that captured most attention. That wording was much softer than it has been in recent months, which can be viewed as the RBNZ starting to lay the groundwork for eventual OCR cuts – not yet, but possibly signalling late in 2024. That means mortgage holders might finally see some rate relief before Christmas.
Now, don’t get carried away. Inflation is still above target, and price shocks (e.g. higher petrol prices) can occur anytime. As such, the RBNZ will be hugely wary of cutting too early. But it’s clear the economy is struggling, and that is rightly being acknowledged in the monetary policy discussion. The focus will now shift to this week’s inflation data (more below), the labour market stats on August 7, and then the next OCR decision itself on August 14. That’s probably too early for an OCR cut, but I’d anticipate a reasonable shift in the RBNZ’s projections for inflation and the cash rate itself, setting the scene for a (possible) cut in November.
2. All eyes on the CPI
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Stats NZ will on Wednesday at 10.45am publish the Q2 consumers price inflation figures – the sole target for the RBNZ in terms of their OCR decisions. The RBNZ is anticipating a headline inflation figure of 3.6%, which would still be above the 1-3% medium-term target range, but the lowest since Q2 2021 (3.3%). Anything less than 3.6% would tend to reinforce the creeping view that the OCR could be cut in November. Of course, a higher figure would work in the other direction.
CoreLogic chief economist Kelvin Davidson: "It makes sense to fix short when the next big moves in mortgage rates will be downwards." Photo / Peter Meecham
3. Construction costs have fallen …
One part of the wider inflation story that is nicely falling into place is a drop in house-building costs, with a fall of 1.1% on the Cordell Construction Cost Index in Q2 (covering wages and materials, but not land). That’s the first decline recorded on the CCCI, which goes back to late 2012. Of course, while this is great for households looking at a new-build project, it stems from the wider construction sector downturn – which is not so good, in the sense that we need a solid flow of new-builds to keep coming to market, helping to prevent the types of shortages that we’ve seen in the past. At least on that front, the Government’s aggressive moves to open up more land for housing and simplify the planning system will hopefully pay dividends.
4. … and migration is down too
Another emerging trend that might tend to subdue inflation (by extracting money out of the economy), as well as the housing market, is the decline in net migration. In fact, May’s result was a net outflow of people, the first negative, monthly migration figure since June 2022, driven primarily by a rise in departures of both NZ and non-NZ citizens, although arrivals have flattened off too.
5. Still fixing short
And finally, with some light now starting to emerge at the end of the mortgage rate tunnel, it remains very interesting to track what borrowers are actually doing when they purchase a house, switch banks, or top up their loans. In May, 56% of loans were fixed for up to 12 months, which was a touch less than March and April, but still historically high. It makes sense to fix short when the next big moves in mortgage rates will be downwards. But the complication right now is that the shorter rates are higher; so people are paying more now, to hopefully save later. Never an easy call.
- Kelvin Davidson is chief economist at property insights firm CoreLogic
