Today’s decision by the Reserve Bank of New Zealand (RBNZ) to leave the official cash rate (OCR) unchanged at 5.5% may have been a close call, with quite a bit of advance speculation that they could have opted for an increase to 5.75%. In the end, of course, the decision was made to keep it steady for now – but there’s little tolerance at the RBNZ for any upside inflation surprises.
In the commentary that went alongside the decision the RBNZ noted that headline inflation is coming down. This will be tending to calm inflation expectations too, which should help take some heat out of wages and general price pressure across the economy. That said, the RBNZ hasn’t relaxed on inflation yet and is still ‘talking tough’.
The latest detailed forecasts in the Monetary Policy Statement suggest that the economy will continue to (just) avoid recession, employment should remain on a slowly growing trend, house prices are likely to creep higher, and inflation itself should slow further, to reach the 1-3% target by the September quarter this year.
But even if the cash rate is at its peak for this cycle, it’s not likely to fall anytime soon either. Indeed, with non-tradable/domestic inflation still a concern, driven by the likes of rents and council rates, the RBNZ’s projections show the OCR holding until at least early 2025, with cuts not really seen until closer to the middle of next year. This suggests a period of ‘higher for longer’ one to two-year fixed mortgage rates as well, which will restrain new property demand and also cause a few headaches for households needing to reprice existing loans up to current market rates.
So what’s the upshot for the property market? In truth, not a lot has changed based on today’s decision. Mortgage rates still seem to be roughly at a peak, although might not fall much anytime soon either. The labour market should support property, but perhaps not drive it up strongly. Migration is an upwards boost for property demand, and especially renting right now, but this extra impetus might not last much longer.
As such, the variability we’re already seeing in sales volumes and house prices from month to month and across regions may well continue for a while yet. Sales volumes might rise across NZ by 10% this calendar year, but from a low base. And national average prices could edge up by 5%, an underwhelming rise compared with the early stages of past upturns.
