Has the official cash rate remained on hold?

The Reserve Bank has stuck to the script, leaving the official cash rate unchanged at 5.5%.

It marks the second consecutive pause this year and follows 525 basis points of rate hikes since October 2021, as the Reserve Bank of New Zealand has continued to tackle high inflation.

Wednesday’s decision was widely anticipated by economists, Westpac, ANZ and Kiwibank having confirmed their forecasts were that the RBNZ would keep the cash rate on hold in August.

In Wednesday’s monetary policy statement, RBNZ governor Adrian Orr (pictured above left) said that the current level of interest rates was constraining spending and inflation pressure, as anticipated and required.

“The Committee agreed that the OCR needs to stay at restrictive levels for the foreseeable future to ensure annual consumer price inflation returns to the 1 to 3% target range, while supporting maximum sustainable employment,” Orr said.

Wayne Henry Mortgages director Wayne Henry (pictured above right) said that although a further pause was positive for borrowers, there was still evidence of cost increases across many sectors.

For mortgage holders, it was business as usual, he said.

“It may represent the end of a cycle, but Kiwis are not silly, and will recognise that interest rates will not be coming down at the rate they went up,” Henry said.

Borrowers entering the property market know no different: at 6% over the June 2023 quarter, inflation is still high, he said.  But there is a sense of optimism that there is light at the end of the tunnel.

“For those of us who have been on the rate gravy train for the past 8 years, the last 18 months has been a very tough pill to swallow,” Henry said.

In response to whether new borrowers and those rolling off existing fixed rate loans were leaning towards a particular fixed rate term or strategy, Henry said that shorter fixed rate terms (1 or 2 years) remained a popular option for borrowers wanting certainty around their repayments.

“We are certainly making sure we limit clients exposure by breaking up their loan into smaller amounts over different fixed rate terms, as this reduces a clients overall exposure to rates moving up or down,” Henry said.

“For clients who are able to take a little more risk we are moving them onto a flexible facility or leaving their rate on floating.”

RBNZ chief economist Paul Conway said in June that the central bank’s projections were that the official cash rate had peaked in the current cycle, adding that this was a projection, not a promise.

In its August statement projections, the RBNZ said that annual headline CPI inflation is assumed to have peaked, and that capacity pressures around non-tradables inflation are expected to continue to ease over the year.

House prices have stabilised, says RBNZ

The RBNZ said in its August statement that REINZ figures showed that house prices had fell 15% (seasonally-adjusted terms) from their peak in November 2021 to March 2021. Increases in net immigration and the number of residents, strong employment and nominal wage growth, slower increases in retail mortgage interest rates and relatively low stock levels for sale had contributed to the recent stabilisation in house prices, it said.

Reserve Bank forecasts show no further falls in house prices and assume that prices will grow gradually over the next year, before increasing at a slightly faster pace.

Bank economists divided on further rate rise this year

Westpac senior economist, financial markets Satish Ranchhod told NZ Adviser that bank continued to forecast a further rate hike in November, reflecting expectations that domestic inflation pressures would persist, eventually requiring further monetary policy tightening.

ANZ senior economist Sharon Zollner said ANZ also expected one further hike in November, describing it as a “placeholder”. This view was taken in May and is based on the idea that the Reserve Bank would either choose not to hike again at all, or hike by more than 0.25%, rather than go to the trouble of hiking by quarter of a percentage point, she said.

Kiwibank senior economist Mary Jo Vergara told NZ Adviser said that the bank expected the RBNZ to “sit tight” for the remainder of 2023, leaving the cash rate at 5.50%, adding that the bank expected the central bank’s next move to be a rate cut.

“With 525bp of tightening already delivered, we think the RBNZ has done more than enough to slow the economy and return inflation to target,” Vergara said.

“If the economy develops in line with our forecasts - with very weak economic activity and falling inflation - then the discussion should shift to rate cuts as we head into next year.”

When is the first rate cut forecast?

Westpac is forecasting gradual rate cuts to start in August 2024, while Kiwibank has pencilled in the first rate cut to occur in February.