Not over yet

It has also pushed back expectations of OCR cuts to the very end of next year. 

The bank says the RBNZ pause is not necessarily a peak and by November the data will show inflation is still sticky.

In past tightening cycles the Reserve Bank has paused before hiking again. In 2005 it paused for six months before hiking twice, then went on hold for more than a year before hiking four more times.

ANZ chief economist Sharon Zollner says the big turn in immigration numbers is the main part of the puzzle. 

“After identifying it as an upside risk to medium-term activity and inflation in April, the RBNZ sounded far more unsure this month.

“It has tripled its assumption for annual net migration (working age) for this year to 75,200. While that’s likely to ease constraints in the labour market and put downward pressure on wages, we are wary of the impacts on general demand and house prices and rents in particular, just as the housing  market is showing signs of life”

She says given these upside risks, ANZ still thinks further hikes are on the table, but the RBNZ faces a high hurdle if it does recommence tightening having called a pause now.

“Looking at the key incoming data before the next few meetings, we don’t see it as being enough to sway the RBNZ from holding rates at 5.50%.

“But we expect these demand effects will continue to build, and by November the case for further hikes will be clear.”

Clearer after election

Westpac chief executive Kelly Eckhold sees the OCR rising again after the October general election.

The case for a further move to 6% will become clearer to the RBNZ after the election.

He says August is pretty much the last stop on the line before the election period starts in earnest.

By then, data on house prices and migration will be available that can either confirm or refute the Reserve Bank’s current view. Similarly, the June quarter labour market report will be available.

The bank says the RBNZ will be on hold in July, but it anticipates an increase of 25 points to 5.75% at the August Monetary Policy Statement.

Eckhold is predicting the first OCR cut to be in July 2024, ahead of the ANZ’s forecast. 

Slim chance

Meanwhile, the BNZ has taken a different stance.

It thought the RBNZ would open the door to the possibility, though not probability, of a further OCR hike to 5.75%.

“Instead, it slammed this door shut,” Stephen Toplis, BNZ research head says. “The risk of a shift to 5.75% is not zero but it is now looking slim.”

“It will come as no surprise to hear that a financial market that was once contemplating the potential for the cash rate to peak at 6% has been given a wee shock, so much so that only a modest chance of a rate move above 5.5% remains priced. This seems entirely apt.”

He says, in reality, the chance is near zero for the next meeting but if the market wants to take sides then there must still be more chance of a hike than a cut.