Source: Radio New Zealand
How soon is the official cash rate (OCR) likely to start to increase? And will any hint of it send what banks charge higher?
For many homeowners and households, that will be the main thing on their minds when the Reserve Bank issues its next update this week.
It cut the OCR to 2.25 percent in November, but what captured the most attention was the indication that it did not necessarily think it would cut rates much further.
Market attention turned to when the rate might start to lift, and wholesale rates increased, taking banks’ home loan rates with them.
Reserve Bank Governor Anna Breman took the unusual step of warning that it might have been an overreaction.
In recent days though, all the main banks have again shifted their longer-term rates higher, as inflation worries continue to simmer.
ANZ senior economist Miles Workman said any insight the bank gave into the future path of interest rates would be key for most households.
“Swap rates have lifted meaningfully since the November MPS (monetary policy statement) as markets have reassessed the outlook for monetary policy following the inflationary vibe across recent data releases.
“And that’s put upward pressure on fixed mortgage rates. The February MPS is an opportunity for the Reserve Bank to signal whether it thinks that move is justified by recent data and its updated economic outlook. Households may also be listening closely to what the bank says about the inflation and labour market outlooks, given cost of living pressures remain and the labour market is still soft.”
Mike Jones, chief economist at BNZ, said the Reserve Bank would need to walk a fine line between signalling the OCR would not stay as low for as long as previously thought, and not sending financial markets higher on the expectation of future increases.
“There will probably be a hat tip from the bank to the fact the economic recovery is growing in momentum, but equally confirmation that a period of low interest rates is still part of the plan to ensure it gets going proper and current spare capacity is soaked up.
“There does appear to be some concern out there about whether recent lifts in wholesale and retail interest rates might lean against the fledgling economic recovery. The bank will also be wary of this, but it’s also important to note most mortgage borrowers soon to experience a mortgage rate reset will be rolling on to a rate more favourable than previously. So, there’s still some of the lagged impacts of previous rate cuts to come through.”
He said households would probably also want to see confirmation that the bank still thinks inflation will return to about 2 percent later this year.
Westpac chief economist Kelly Eckhold said it would also be interesting to watch Breman‘s first press conference.
“It will be the first opportunity we get to understand what sort of things she thinks are important, how she chooses to express the trade-offs that she inevitably has to deal with when deciding what to do with policy. Ultimately, is she dovish? Is she hawkish? What sort of factors and variables is she going to make more prominent when explaining to people what she’s doing?”
He said the market had already priced in a lot of cash rate rises this year.
“It’s not to say that it’s impossible that they could price in more, but it feels like the hurdle, the bar is set quite high to really have those rates have to go up much further.
“Perhaps, if she was to say that a September rate hike might be something that’s a realistic possibility, that could be the sort of thing that would leave the market to obviously fully price that in, and maybe even start speculating about an earlier move than that. But it strikes me as relatively unlikely, and that instead she might talk about the possibility of a rate rise at the end of the year. And, you know, possibility could have a capital P or a small p, depending on the nature of the discussion that’s around it.”
He said households might also be interested in what the Reserve Bank expects of house prices.
“We’re not really forecasting a house-price led recovery. We’ve got 4 percent [increase in house prices] this year, which is close to where the Reserve Bank was forecasting them at the end of last year.
“What does she think about that? Does she think that the fortunes of the housing market are tightly tied to the fortunes of the broader economy, or not?”
Westpac last week changed its forecast. It still expects a first increase in November, but then increases at each meeting between February and September 2027.
“We’ve basically upgraded the growth forecasts, so that means excess capacity will get used up a bit more quickly based on our revised view,” Eckhold said.
“We think once they get going they’ll move a bit more quickly, because by the end of the year, if the growth outlook that we are depicting has panned out then it won’t really be appropriate to have interest rates in the 2 percents.”
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand
