OCR won’t impact the general election

Research head Stephen Toplis says it was not only the bank’s rhetoric but also because there is no talk of moving rates in either direction between now and October’s general election.

Inflation has peaked and wholesale interest rates have also likely peaked after the Reserve Bank yesterday lifted the OCR to 5.5% and will pause any further increases.

It, however, didn’t stop the ASB from immediately passing on the 25bp rise to some mortgage interest rates. Its housing variable rate moved from 8.39% to 8.64% and the Orbit rate from 8.48% to 8.74%.

Toplis says had the bank’s economists been at the helm they would not have hiked the OCR yesterday.

“We were not alone. Two of the members of the Monetary Policy Committee were of the same view,” he says.

Toplis says another point of interest was always going to be what the RBNZ’s opinion on the relative supply and demand impacts of the current surge in migration.

“The answer seems to be that, for now at least, it believes the deflationary impact on wage growth outweighs the inflationary impact emanating from the increase in demand.

“Indeed, the bank is not even sure there is a substantial increase in demand, as evidenced by its continued belief that the economy will go into recession later this year.”

But, while dovish, Toplis says there is a clear message that the RBNZ does not expect interest rates to fall any time soon.

According to the bank’s modelled cash rate track, it would appear the first rate cut is not expected to happen until the fourth quarter of 2024. And, once rate cuts start they will gather substantial momentum, so by June 2026 a cash rate of just 3.25% can be expected.

Toplis says the BNZ is expecting a first cut in May 2024. “The balance of risk is that the reduction starts even earlier. With 29% of the committee already of the view that the cash rate should not be 5.25% at this juncture, the bias has been clearly established.”

He says, as would be expected, that rates right across the curve have fallen. The RBNZ must have known that this would be the case so one can only assume it is less bothered by the possibility of a drop in lending rates than it was when it highlighted those concerns at the time of its April decision.”

More friend than foe

While some economists believed further rises were inevitable because of an expansionary Government Budget and an influx of migrants, RBNZ governor Adrian Orr said at a press conference that the Government’s policy making was “more of a friend than a foe”.

“We totally understand the challenges that society is going through and the Government spending/investment that is needed,” says Orr.

“It is net contractionary through the forecast period and that is what matters most for our decision making on monetary policy.”

The RBNZ noted that much of the increase in Government spending will go towards the cyclone recovery.