Posted March 7th, 2024

The Reserve Bank has kept the official cash rate (OCR) at 5.5 per cent, as expected. But it softened its stance slightly, with new forecasts suggesting it might be on track to cut sooner than it had previously indicated.

“Over the past year or so, the New Zealand economy has evolved broadly as anticipated by the committee,” Reserve Bank (RBNZ) Governor Adrian Orr said in the Monetary Policy Statement (MPS).
“Core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced.”
But headline inflation was still well above the 1 to 3 per cent target band, limiting the RBNZ Monetary Policy Committee’s ability to “tolerate upside inflation surprises”.

ASB chief economist Nick Tuffley said the tone “wasn’t as hawkish as it could have been, with the risks now noted as more balanced as opposed to the upward skew noted in November’s MPS”.
“The OCR track was revised down slightly in the near term to a peak of 5.6 per cent [previously 5.69 per cent] but was little changed over the longer term,” he said. “The track still implies some chance of an OCR hike over the remainder of 2024, and is consistent with OCR cuts from around [the second quarter] 2025.”

Inflation was still forecast to get back within the 1-3 per cent target band by September 2024 and to the 2 per cent mid-point by the end of December 2025 (a fraction later than in the November forecasts), he said. ASB continues to expect the RBNZ will cut the OCR in November.

The New Zealand dollar and wholesale interest rates fell sharply in response to the announcement, which was seen as being less hawkish than expected.
Soon after the release, the New Zealand dollar was at US61.20c, down from US61.80c. In interest rates, the two-year swap rate, which can influence home mortgage rates, dropped to 5.05 per cent from 5.21 per cent.

Overall, the central bank painted a somewhat sobering outlook for the global economy but did point to some benefits to New Zealand.

“Global economic growth remains below trend and is expected to slow further during 2024. This subdued environment will support a further moderation in New Zealand’s import price inflation.”

The outlook for China’s economy was very poor, relative to recent historical norms, the RBNZ committee added.

“A more general risk to global growth is that central banks may need to keep policy interest rates at restrictive levels for longer than currently reflected by financial market pricing, to ensure that inflation targets are met.”

Heightened geopolitical and climate conditions were also a risk for inflation, the central bank added.

And the bank indicated there might not be a rate cut anytime soon.

The OCR must stay at a “restrictive level for a sustained period of time” to ensure headline inflation returns to the 1 to 3 per cent target.

Headline inflation most usually refers to the Consumers Price Index (CPI).

Annual inflation, measured by the CPI, was 4.7 per cent in the final three months of 2023.

There’s a strong correlation between the OCR and bank rates, as anyone who has re-fixed a mortgage in the past six months may have felt.

But the extent to which it works and the speed at which it works are hard to know precisely.

The RBNZ was one of the first central banks to hike interest rates when pandemic-fuelled inflation spiralled out of control, but it may be one of the last to cut rates.

Our annual inflation rate sits at 4.7 per cent. That’s higher than Australia (4.1 per cent), the United Kingdom (4 per cent), the US (3 per cent), or the Eurozone (2.8 per cent).

“The United States will probably start cutting rates later this year. The European Central Bank will probably follow suit,” New York-based Aurora Macro Strategies chief economist Dimitris Valatsas told Markets with Madison.

The Reserve Bank has done research assessing how the effects flow through from the OCR to bank rates.

Some of that research found a 1 per cent change in the OCR typically moves average two-year mortgage rates by 0.34 per cent within one month.

Until a few weeks ago, markets had assumed hikes were done and inflation was beaten.

But stronger-than-expected labour market data has pushed back expectations for rate cuts.

 

This article was first published in the New Zealand Herald. 28 Feb 2024