Today’s decision from the Reserve Bank of New Zealand (RBNZ) to leave the official cash rate (OCR) unchanged at 5.5% won’t have surprised anybody. That’s because the incoming data since their last decision (4th October) has stuck tightly to the script – namely CPI inflation trending lower and the unemployment rate edging upwards.
As part of today’s Monetary Policy Statement, the written release noted the Committee’s considerations of high population growth on demand and the potential impact of keeping inflation above target. It was also noted that the incoming Government’s policy programme will have implications for economic activity and inflation which will need to be assessed as they’re incorporated into official forecasts.
For now, there was no mention of Government coalition deals which suggested a change in mandate for the Bank to focus solely on price stability.
Perhaps the greatest surprise from the statement, and what will draw a lot of attention is the refreshed OCR track which included an upwards revision to the OCR peak, to 5.69 in September 2024, from a previous peak of 5.59 in June 2024. The timing of OCR cuts was therefore also pushed back with it not expected to fall below until the end of 2025.
All in all, then, it’s relatively ‘business as usual’. The RBNZ remains open to needing to raise the OCR again in this cycle, but the likelihood, given the favourable trajectory of recent data, still seems low. In other words, given the lingering inflation problem we have, it’s still a case of ‘higher for longer’ when it comes to the OCR.
Now, of course, mortgage rates are driven by many factors, not just the OCR – including competitive pressures in the banking sector, and what’s happening to offshore wholesale financing rates too. But even so, with the RBNZ still talking tough about the OCR, it does somewhat reduce the chances that we might see reasonable falls in shorter-term mortgage rates here within say a 12-month horizon.
Accordingly, new borrowers will continue to face challenges in terms of satisfying serviceability testing, while many existing mortgage-holders will still need to budget for higher debt servicing costs when their current loans reprice over the next year or so. These pressures are likely to keep a lid on housing market activity and prices, especially if a few more job losses did start to come through.
That said, none of this is fresh news. We’ve been suggesting for some time now that the emerging housing market recovery could prove a bit slow and patchy – given stretched affordability, high mortgage rates, and possible caps on debt to income ratios in 2024. While nothing has changed on that front, sales volumes should continue to rise, but even 10% growth next year would leave them at a low level, and it wouldn’t be a surprise to see price gains of ‘only’ 3-5% in 2024 either.
