The bad news is undoubtedly that RBNZ has pushed out the likelihood of the first cut in its official cash rate from the June quarter of next year to the second half of 2025 and perhaps not even until the last quarter of 2025.
It also left the door ajar to the chance of another hike this year, although at the media conference governor Adrian Orr rubbished the suggestion that RBNZ's projections implied an 80% chance of a hike.
“I don't buy into that,” Orr said, adding that the projection indicates RBNZ has “limited risk tolerance” for upside surprises in economic data.
RBNZ chief economist Paul Conway said the 80% estimate is “spurious” and that for a hike to happen would require the economy to evolve exactly as RBNZ's model implies, and that's unlikely, given the amount of uncertainty currently.
Those RBNZ projections now have the OCR peaking at 5.7% - it has been at 5.5% since May last year – in the December quarter this year.
The statement noted that the wholesale market had priced in a 25 basis point cut to 5.25% in November this year and two further 25 point cuts by April 2025, but added that the market has been “volatile.”
The good news includes that RBNZ thinks average mortgage rates have neared their peak at 6.5% and Orr said the central bank is comfortable with recent small cuts in bank mortgage rates and that they had been taken into account in the projections.
The OCR tends to have the most impact of floating mortgage rates and its impact diminishes on longer-term fixed mortgage rates from about two years onwards. The longer-term rates are more influenced by global interest rates, particularly US rates.
Another piece of good news is that although RBNZ remains concerned about domestic inflation pressures, to date inflation has eased mostly on housing and construction costs.
“Slower price increases in construction accounted for much of the decline in the housing costs component of non-tradeable inflation,” the statement said.
“Even though housing-related inflation is getting closer to its pre-pandemic level, the rental component remained historically high in the March 2024 quarter,” it said.
“Rent inflation is likely to remain high in the near term, as strong migration-led population growth adds to housing demand, while new dwelling construction slows.”
In a special topic box, RBNZ rated rentals as “medium” responsive to monetary policy but local council rates and insurance, as well as household energy costs, as “less responsive.”
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