Our take on the latest Monetary policy review (Wed 16 Aug 2023)
OCR on hold at 5.50%
RBNZ expects OCR to stay at current level longer than previously
RBNZ sees economy "evolving broadly as anticipated"
The key numbers...
- The Reserve Bank again held the official cash rate (OCR) unchanged at 5.50%, and noted that the “New Zealand economy is evolving broadly as anticipated”.
- However, the Bank also stated in the wider Monetary Policy Statement that “it is expected that the OCR will need to remain near its current level for slightly longer than assumed in the May Statement…”, and that this view was due to “stronger supply-led export volumes in the near term, an earlier stabilisation in house prices, and a slight upward revision to the nominal neutral OCR… partially offset by lower overall domestic activity at the start of 2023 and lower import and export prices.”
- The Reserve Bank has also slightly upgraded its peak OCR rate from 5.50% to 5.59%, which in practice implies the Bank sees a stronger potential for a further increase to the OCR at the end of 2023 or early 2024.
- The Bank’s outlook for inflation and GDP remain very similar to its forecasts in May, but it has upgraded its expectations for house prices markedly. House prices are now expected to have reached a low point over a year earlier than expected in the May Statement. Over the two years to the end of 2025, the Reserve Bank now sees house prices rising 9.5%, compared to just 0.4% previously.
Staying higher for longer
Official cash rate, quarterly averages. Source: RBNZ
...and our reaction
- The little changes made by the Reserve Bank today to its forecasts for the OCR signal a strengthening in its view that interest rates will need to remain higher for longer to achieve a moderation in inflation.
- The Bank made clear that it believes the path the economy is currently taking is in line with its expectations, and consistent with inflation returning to within the 1-3% target band by the end of 2024.
- The slight increase in the peak OCR doesn’t show a change of view from the Reserve Bank that there definitely needs to be further increases to the OCR at the end of the year, but the slight lift does imply that the Bank now thinks there’s more of a probability of a raise than before. Infometrics is sticking to our view for now that there will be no further increases to the OCR.
- The Bank’s view of stronger house price growth than previously could pose an upside risk to inflationary pressures and require a stronger OCR response than we are currently forecasting. Higher house prices have seen private consumption growth forecasts upgraded from mid-2024, and the outlook for housing will remain in key focus over the next few months.
- The increase in house price inflation will likely further exacerbate housing unaffordability concerns.
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