Economists eye a 25-point OCR hike in September as businesses show early signs of relief
New Zealand's mortgage market is bracing for another official cash rate hike, with bank economists near-unanimous that the Reserve Bank will lift the OCR to 2.75% at its 2 September Monetary Policy Statement, even as fresh data shows early signs that inflationary pressure may be starting to ease.
Inflation expectations soften, but hurdle for pause remains high
The RBNZ's Q3 Business Inflation Expectations Survey showed a broad-based improvement, with businesses' one-year-ahead inflation expectations falling from 3.68% to 2.99%, edging back within the central bank's 1-3% target band for the first time in some months. Two-year expectations eased from 2.87% to 2.55%, and 10-year expectations dropped to 2.51%.
Kiwibank economists noted the reading is "comically close to the Reserve Bank's 3% upper limit of its target band," while ASB acting chief economist Kim Mundy said "in our view this is a dovish signal as it suggests that the subdued demand backdrop and spare economic capacity is tempering price pressures." Despite this, ASB cautioned that all measures remain above the RBNZ's 2% midpoint, meaning sustained progress back to target is not guaranteed.
Market pricing has a 25-basis-point September hike at roughly 95% certainty, with a cumulative 55 basis points of hikes priced in by year end, taking the OCR to around 3.05%. As ASB Senior Economist Mark Smith put it, "there still looks to be a high hurdle to prevent at least 50bp of OCR hikes by year end," arguing a 2.75% cash rate would look "light" against both the near-term inflation outlook and an estimated 3.25% neutral OCR.
Fuel costs and trade deficit add pressure
Adding to the inflation picture, New Zealand's trade deficit widened sharply to $1.9 billion in July, driven largely by a 127% surge in petroleum import values as global oil prices climbed on renewed Middle East tensions. Businesses also continue to absorb rising input costs rather than passing them fully onto customers, with June quarter input costs rising 2.9% against 1.6% for output prices — a sign of ongoing margin squeeze that could keep underlying inflation sticky.
Consumer spending shows signs of life
Against this backdrop, there are pockets of encouraging news for borrowers and brokers alike. Consumer card spending rebounded in July across discretionary categories including hospitality, apparel, and consumables, while the Roy Morgan Consumer Confidence index lifted in July, moving back above March levels.
Offshore, Westpac chief economist Luci Ellis noted that "rumblings of investor discontent about the US fiscal position have become evident in yields," a dynamic likely to keep global borrowing costs elevated even as central banks including the RBNZ continue to tighten policy.
For mortgage advisers, the message is one of continued near-term rate pressure, with any relief for borrowing capacity or property investors likely to remain some way off.
For more insights, read the ASB, Westpac, and Kiwibank reports.
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