Kelvin Davidson outlines what today's cash rate decision means.
Today’s decision from the Reserve Bank of New Zealand (RBNZ) to leave the official cash rate (OCR) unchanged at 5.5% comes as no great surprise, given that general economic conditions – namely inflation and the labour market – haven’t materially shifted off course since the last decision in mid-August. In fact, inflation expectations from last week’s ANZ business and consumer confidence surveys, for example, showed further encouraging signs of slowing down.
The statement from the Monetary Policy Committee that accompanied today’s decision seemed quite short and to the point – the decision to hold at 5.5% was unanimous, and the risks to inflation still seem relatively balanced (e.g. petrol prices boosting inflation; the lagged effects of previous OCR rises on households helping to bring it down).
Taking all of this together, the chances of an OCR increase at the next meeting (and full Monetary Policy Statement/MPS) on 29th November still seem finely balanced. The recent falls in projected dairy prices and the lagged effects that are still be fully felt from previous monetary policy tightening – as existing mortgage holders reprice up to current interest rates – probably argue for no change. But the sense that inflation itself is proving more stubborn than expected suggests the opposite.
As such, ‘wait and see’ still seems to be the order of the day, and on that note, there are two vital data releases prior to the next MPS – Q3 inflation data on 17th October and official labour market figures on 1st November. Of course, even if those releases contain some degree of comfort for the RBNZ, we need to keep in mind that there’s a three-month break from November’s MPS until the following decision on 28th February next year. At the margins, that might tip the balance towards earlier action from the RBNZ to ‘get ahead of the curve’ – as could a potential change of government and the introduction of more property-friendly policies.
In terms of the housing market, though, the near-term implications from all of this are probably still fairly neutral. Even if the OCR did rise again before the end of the year, the big increases in mortgage rates have already been seen – and generally, they’ve been absorbed, thanks to the low unemployment rate. Meanwhile, sales volumes are picking up and house prices seem to have broadly found a floor, even starting to rise again in some areas.
Of course, nobody is thinking about OCR cuts or significant falls in mortgage rates for at least another year or so, meaning that this housing ‘upturn’ could be pretty subdued by past standards – especially with affordability still stretched and caps on debt to income ratios for mortgage lending potentially on the cards in 2024.