ANALYSIS: Last week, the Reserve Bank of New Zealand decided to hold the Official Cash Rate at 5.5%. In its accompanying statement, the RBNZ said that while “risks to the inflation outlook have become more balanced”, the cash rate would need to “remain at a restrictive level for a sustained period of time” to ensure headline inflation return to the 1-3% target.
So what does “sustained period of time” mean? The RBNZ’s latest outlook for the OCR is “slightly lower” than what it had outlined in its November 2023 statement, but it looks as if it doesn’t plan to drop the OCR until the end of this year or early 2025.
Two of the country’s major banks, ASB and ANZ, have reacted to the latest decision by cutting some of their home lending rates. That’s significant in the case of ANZ, which had predicted further cash rate hikes this year.
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The RBNZ’s latest cash rate forecast can be seen in the graph below. These forecasts are important as they can influence current housing market sentiment, but how dependable are they as a marker of future activity and decisions? Let’s find out.
Prediction 1: The OCR won’t drop until the end of 2024 / early 2025
While the RBNZ’s language around inflation in its statement last week was less harsh than many had expected, it doesn’t plan to drop the OCR any time soon.
Inflation is still too high at 4.7%, with the RBNZ acknowledging that high interest rates are doing their job (that’s why there is a lower chance that the OCR will increase again).
Back in November, the RBNZ’s forecasts implied there was a 75% chance of the OCR being raised one more time. The latest forecast lowers that risk to 40%. So there is a better-than-even chance that the OCR’s next move is downward.
Opes Partners resident economist Ed McKnight: "Most of the major banks have lowered their rates over the last three months, albeit by small amounts." Photo / Fiona Goodall
The forecasts also point to a quicker return to lower rates when the RBNZ finally starts cutting the OCR.
So will the RBNZ stick to its guns and hold the OCR until the end of the year?
Going on past performance, RBNZ tends to stick closely to its own OCR forecasts for the first six or seven months of the year. Markets are currently pricing in an OCR cut, perhaps as early as September. Don’t dismiss that straight away. It is possible and would be consistent with the RBNZ’s own track record.
Prediction 2: House prices will rise 3.4% in 2024
The RBNZ’s forecast of 3.4% house price growth in the year to the end of December is lower than its previous forecast for 2024, but it’s probably better to ignore the RBNZ’s house price forecasts altogether. They are just guesstimates.
Since Covid hit, the RBNZ’s house price forecasts have been, like everyone else’s, totally off. On average, the RBNZ tends to be 4.6% off, so when it says house prices could climb 3.4%, the actual figure could easily range between -1.2% and 8%.
Prediction 3: “We should be seeing the banks working hard to win against one another”
While not a formal forecast, the RBNZ’s February statement did contain some welcome news for borrowers.
There had been speculation in the lead up to the February statement that the RBNZ had had a private word with the major banks, urging them to keep their rates high.
The RBNZ has quashed such thoughts.
Answering a question last week from New Zealand Herald reporter Jenée Tibshraeny, RBNZ Governor Adrian Orr said he was comfortable with mortgage rates decreasing. “Yes, it’s a competitive environment … banks will compete with each other on their pricing,” he said.
“I really do hope it’s competitive out there because I imagine it’s in a low-volume market as well. We should be seeing pricing pressures. We should be seeing margins tightening up. We should be seeing the banks working hard to win against one another.”
This is worth paying attention to. If the banks lower their interest rates, that won’t necessarily lead to fresh worries about inflation and as a result a fresh round of OCR hikes.
That will bring some comfort to anyone with a mortgage. Most of the major banks have lowered their rates over the last three months, albeit by small amounts.
These are small changes, but they show the direction of travel over the next year.
- Ed McKnight is the resident economist at property investment company Opes Partners
