Interest rate decision: Reserve Bank keeps OCR on hold, warns policy could remain ‘restrictive for longer’

The Reserve Bank has kept the official cash rate (OCR) unchanged at 5.5 per cent, saying inflation is falling and should reach the target again by the end of 2024.

But, in what has been received as a statement of aggressive monetary policy, he warned that rates may need to stay high for longer.

It was the seventh consecutive time that the Monetary Policy Committee left the OCR unchanged as it seeks to bring inflation back to its target band of 1-3 percent.

The Reserve Bank (RBNZ) left its forecast for OCR cuts largely unchanged. But the committee warned that policy may need to remain “restrictive for longer than anticipated at the February meeting, to ensure that the inflation target is met.”

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It will be unpleasant news for mortgage holders.

While the core message was not significantly different from February, the new rate trajectory did mean significant cuts to mortgage rates were less likely through 2025, said Kelvin Davidson, chief property economist at CoreLogic NZ.

“It’s worth noting that OCR is not the only influence on mortgage rates; Factors such as banking competition and offshore funding rates also play a role,” Davidson said.

“But in an environment where OCR cuts look even more likely now for 2025 than 2024, something similar seems like a sensible assumption for mortgage rates as well.”

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“As such, it appears that conditions will remain difficult for at least six to nine months for new borrowers, as well as those existing mortgage holders who still need to fully adjust their prices to current market rates.

“Sales volumes and property values ​​could also remain quite weak, and even if mortgage rates begin to fall more appreciably in 2025, that is when the limiting influence of (likely) debt on borrowing restrictions income would begin to take effect.

The committee even discussed the possibility of increasing OCR at this meeting.

But it assessed that while the short-term balance of risks around inflation was skewed to the upside, there was more confidence that inflation would decline to within the target range over the medium term.

Financial markets took the statement as a hawkish message based on a slight increase in the forecast for the OCR, with the New Zealand dollar rising around half a US cent to 61.50 cents on the news.

“It was definitely a tough surprise for the market,” said Imre Speizer, senior market strategist at Westpac.

“The main thing was that they raised the OCR forecast by five basis points at the peak, indicating some chance still for a rate hike this cycle, before they start cutting,” Speizer said.

RBNZ forecasts put the OCR at a high of 5.65 per cent in the fourth quarter of this year, up from 5.60 per cent in the previous monetary policy statement published in February.

“Using it higher indicates that they are more concerned about inflation and might need things to be tight for longer, with rate cuts starting later,” Speizer said.

There was considerably greater concern about the strength of services sector inflation and a recognition that some aspects of inflation were not as sensitive to interest rates, ASB chief economist Nick Tuffley said.

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“The RBNZ inflation forecast is higher for the remainder of 2024, and will barely return to the 1-3 per cent target band by the end of 2024,” he said.

“Forecasts show inflation very close to the 2 percent midpoint during the second half of 2025, but will not reach 2 percent until the first half of 2026, later than in the February forecasts.”

“We have maintained our view that the RBNZ will start cutting the OCR from February 2025, but the risk will come later,” he said.

The commission referred to the next budget.

“The reported lower public spending is currently expected to continue contributing to weaker aggregate demand. Any impact of possible changes in the next budget on public spending or on private spending due to tax cuts remains to be assessed,” he said.

Despite a cooling labor market and rising unemployment, rising house rents, insurance costs, council rates and other internal services were cited as drivers of inflation.

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The RBNZ said tight monetary policy has reduced capacity pressures in the New Zealand economy and reduced consumer price inflation. Annual consumer price inflation is expected to return to within the committee’s target range of 1 to 3 percent by the end of 2024.

Liam Dann is general business editor at New Zealand Herald. He is a senior writer and columnist and also hosts and produces videos and podcasts. He joined the Herald in 2003.