By John Carran, Director, Wealth Research at Jarden. John is part of the team supporting Jarden’s Wealth Management Advisors in Tauranga.
In its monetary policy announcement last month, the Reserve Bank of New Zealand (RBNZ) raised the Official Cash Rate (OCR) by 0.25% to 5.5%. To ensure inflation is curbed, the RBNZ expects the OCR to remain at 5.5% until the September quarter of 2024.
The decision to raise the OCR was broadly in line with most economists’ expectations. However, after the previous week’s Budget and recent signs of surging net inward migration, market expectations had reflected the probability of a chunkier 0.5% OCR increase. In addition, many economists expected the RBNZ to signal further OCR rises in the future.
Consequently, financial markets were surprised by the less aggressive OCR announcement, which caused short-term and long-term interest rates to fall materially immediately afterwards. The New Zealand dollar also fell significantly against major currencies.
Things moving in the right direction
In making the OCR decision, the RBNZ Monetary Policy Committee (MPC) expressed its view that inflation is likely to continue declining from here.
While the MPC sees core inflation pressures remaining until capacity constraints ease further, it acknowledges there are signs labour shortages are easing and job vacancies are declining.
In addition, the MPC notes consumer spending and residential construction activity are slowing down. Businesses have recently reported a lack of demand, rather than labour shortages, is now the main constraint on business activity.
The RBNZ still see the economy slipping into recession later this year, but is expected to be milder than it previously predicted. It sees the unemployment rate peaking at 5.4% in the
December quarter of 2024, which is lower than the peak it previously forecast.
The RBNZ’s outlook remains softer than the Treasury forecast in the Budget. Although the Treasury see a weaker economy ahead it expects a recession to be avoided.
After this year’s Budget, there was commentary that its near-term stimulatory effect on the economy may sway the MPC towards a higher OCR this year.
Surging net inward migration was also seen as potentially leading the MPC along a tighter monetary policy path. However, the MPC downplayed these influences for several reasons.
Net inward migration has risen rapidly in recent months, running at an annualised pace of around 130,000 in the three months to March. However, the MPC expects the surge in immigration to be temporary as it reflects the recent easing of immigration rules to alleviate labour shortages in some areas. Migration is something the RBNZ will watch carefully, as it notes the extent and impact of future migration on the economy and inflation pressures is uncertain.
The MPC also noted that, while the Budget adds stimulus to the economy this year, declining surpluses over the following three years mean the fiscal position will likely be contractionary for the economy over that period.
Another matter on the MPC’s radar is the potential impact of repair and rebuilding after the severe weather earlier this year in the North Island. The MPC noted that spending would occur over several years, which means pressures on resources would be spread over time.
Overall government spending is expected to decline in inflation-adjusted terms and in proportion to the economy, which should help to dampen inflation
Therefore, the MPC is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range of 1-3% per annum, while supporting maximum sustainable employment.
The peak OCR has arrived
Last month’s MPS and OCR decision signal the RBNZ is most likely done with raising the OCR in this cycle. It will be in “watch and wait” mode as it observes the lagged impact on the economy and inflation of the incredibly rapid OCR increases over the past 19 months.
While the RBNZ do not see the need for OCR cuts until the second half of 2024, we think a slowing economy and fading inflation may persuade the MPC to decrease the OCR as early as the first quarter of 2024.
For mortgage holders who are suffering from the rapid lifts in their interest costs, the RBNZ’s decision to rule out further OCR increases will provide some respite. Further mortgage relief, particularly for fixed term mortgages, may arrive toward the end of this year if inflation continues its downward trend as the RBNZ predicts.
John Carran is Director, Wealth Research at Jarden. The information and commentary in this article are provided for general information purposes only. It reflects views and research available at the time of publication, using external sources, systems and other data and information we believe to be accurate, complete and reliable at the time of preparation. We make no representation or warranty as to the accuracy, correctness and completeness of that information, and will not be liable or responsible for any error or omission. It is not to be relied upon as a basis for making any investment decision. Please seek specific investment advice before making any investment decision or taking any action. Jarden Securities Limited is an NZX Firm. A financial advice provider disclosure statement is available free of charge at https://www.jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement