OCR could be on hold from now on

The big surprise, says Westpac chief economist Kelly Eckhold, is the RBNZ strongly suggesting the OCR is on hold from here until at least mid-2024.

“We see some upside risks to the RBNZ’s view, but for now the OCR is on hold until July, with some potential of a 25 point rise in August.”

For the first time the Monetary Policy Committee (MPC) held a vote on the OCR decision, debating between no change and a 25 point hike.

Two members voted for no change and the others for the 25 point increase.

Some members discussed potential upside risks to house prices and the economy from migration, but on balance the MPC felt sufficiently confident that a 5.5% OCR will be sufficient to balance those risks.

Eckhold says the bottom line is that this is a central bank that sees itself on hold for a protracted period.

“Key risk factors are likely to be around the RBNZ’s judgment that the quite significant boost in population growth will quickly reverse and not add to housing market or inflation pressures.”

He says data on house prices and migration will be important to watch in that regard. Similarly labour market indicators will be important to watch. 

Eckhold says the Monetary Policy Statement’s emphasis is on pipeline tightening pressures seen as sufficient to reduce inflation significantly.

“There is considerable emphasis on the pipeline of interest rate increases still to be felt by households and businesses. As a result, consumer spending and residential investment are forecast to remain weak.”

While migration pressures are acknowledged, the RBNZ takes a sanguine view on their impact on capacity pressures.

“The RBNZ’s net migration estimates imply a net 75,000 net inflow in the year to December,” says Eckhold.

This is only slightly lower than Westpac’s equivalent forecast of a net 83,000 inflow – on a working-age population basis.

Despite the upgrade, the RBNZ’s view is that this adds significantly to supply as well as demand, he says. “Migration is seen as having some supportive impact on house prices.”

The RBNZ has upgraded its view on potential higher growth but less inflation. “Implicitly, migration is adding to the economy’s capacity in tandem with demand on resources, allowing the economy to grow more strongly without adding to inflation pressures.” 

However, Government spending is not seen as a significant driver of inflation pressures. Eckhold says while the Government is adding somewhat to inflation pressures in the next year, the RBNZ’s view is that the assumed fiscal consolidation in later years will balance out those pressures.

Westpac sees the RBNZ on hold in July, but some potential of a 25 point rise in the OCR in August.

“Should this not eventuate we anticipate the RBNZ to remain on hold until after the election in October.”

By this time Eckhold expects the housing market and migration pressures will be showing up fairly strongly and require a further adjustment in the OCR to the 5.75-6% range.