The Reserve Bank would not like to see mortgage rates fall further for the time being, BNZ economists say.
In recent days there has been a wave of mortgage rate cuts as banks react both to competitive pressures and to the fact that wholesale interest rates have eased.
These falls come after very large increases in mortgage costs over the past year, as our banks reacted both to the RBNZ raising the official exchange rate to fight inflation and, more directly, to because of earlier very large wholesale interest rate hikes – which reflected both the RBNZ’s stance on inflation and what happened internationally in response to global inflationary pressures.
The RBNZ is set to make another interest rate decision next week (August 17), and while our central bank is expected to raise the OCR by another 50 basis points (at 3.0%), there is a growing sentiment in the markets that the OCR could peak at around 4% at the end of this year, and then perhaps even be reduced again next year.
This is despite the current annual inflation of 7.3% and a very clearly signaled intention by the RBNZ to reduce this rate of inflation and curb “inflation expectations”. The higher mortgage rates that have been seen over the past year are a big part of that, as higher mortgage payments dampen spending and slow what has been a very buoyant economy. A hot economy driving inflation.
In his most recent prediction of the likely path of OCR (in the May monetary policy statement) the RBNZ had (page 45) projected that the cash rate would end this year at around 3.5% before peaking at around 4% in June 2023.
However, while the RBNZ had an OCR peak in the middle of next year, it did not expect any fall until the second half of 2024. And this is where market opinion diverges somewhat, with expectations of falls earlier than that.
In a preview of next week’s OCR decision contained in the weekly BNZ Markets Outlook publication, BNZ head of research Stephen Toplis said one of the tricky areas facing the RBNZ is the market’s “desire” to price in rate cuts next year.
“This is particularly relevant given the recent declines in mortgage rates,” he said.
Toplis said he doesn’t think the RBNZ will want mortgage rates to drop further “any time soon”.
Next week’s OCR decision will be accompanied by a new monetary policy statement from the RBNZ which will include an updated forecast “track” for the OCR.
“Of course, the exchange rate [OCR] should return to neutral in due course, but it is unlikely that the Bank [RBNZ] would like to indicate any significant declines within twelve months of the peak in rates,” he said.
He therefore expects that in the new cash rate forecast, the RBNZ will maintain a “peak” to stay in place for about 18 months.
“In our view, the Bank [RBNZ] should be forceful in an attempt to dissuade those who currently determine market prices from such an easing.
“In reality, however, pricing is as much about investors, especially offshore, believing that New Zealand’s yield curve should have a shape similar to that of the rest of the world, regardless of local idiosyncrasies. It is always difficult for the central bank to impede offshore dynamics.”
BNZ economists forecast a 50 point increase in the OCR next week, followed by two batches of 25 points in the next two revisions in October and November.
“We were tempted to increase our October call to 50, but we simply couldn’t find any justification in the data for doing so. And we’re always mindful that we’re not being whipped by the noise of the numbers being released. If, however, the RBNZ is adamant it will return to 50 in October, we will likely adjust our track accordingly.”
Toplis said that from a market perspective, the key elements that are reflected are:
• will the RBNZ clearly indicate that it intends to drop 50 basis points in October?
• Will he indicate his intention to grant two more consecutive increases of 50 points this year (October and November)?
• what will it display as terminal (peak) tariff?
“In short, we think:
• it shouldn’t, although it doesn’t want to provide the market with any excuse to bounce back;
• same thing, around 4.0%.”
Toplis said he still thinks there is a risk that the cash rate may not need to reach 4.0% to achieve the results required by the RBNZ, but sees no reason why the RBNZ would like to modify its most recent forecast of 3.95% given the evidence it has received. nowadays.
“With two meetings, after the one in August, before the end of the year, we doubt that the RBNZ wants to rule out the possibility of additional 75 basis point hikes during this period, so it will probably signal it, leaving 25 other basis points. points for next year.”