Much has changed over the past six weeks and while three RBNZ Monetary Policy Committee members had voted for a rate hike in May, he thinks the “on hold” decision may well be reached by consensus.
While Eckhold called for an OCR increase at the RBNZ’s May meeting, he now says there seems much to be gained from waiting to see the outcome of the June quarter CPI.
“Certainly, the risks of prolonged second-round price impacts are lower than thought given the Iran conflict seems to have resolved much sooner than expected and energy prices have declined.”
Prospects for a normalisation of the OCR will remain a feature of the RBNZ’s communication at the meeting , Westpac says.
It expects the RBNZ to shift the frame of reference towards the view the MPC held pre-war, when it envisaged a single OCR hike no sooner than the end of this year.
“As inflation is still higher than anticipated back in February, we think it will signal bringing forward of the date of lift off in the OCR to September but suggest a gradual trajectory from there if second-round inflation pressures from the Middle East supply shock remain in check.”
Eckhold says higher interest rates are in prospect in time, but the urgency to begin the process now when such critical evidence is available just around the corner is gone.
“A gradual approach of 0.25% increases to the OCR in September and December should prove sufficient for now.”
The economy will continue to recover through the second half of the year, calling for a return of the OCR to hopefully not much higher than neutral levels – in the high 3s – next year, he says.
“The risk is that the exchange rate will depreciate further over the balance of the year given steep negative interest rate differentials.
“If this occurs, this will aid the needed rebalancing of the economy.”
Eckhold says the market needs to be reminded of the importance of data dependence in determining future OCR adjustments.
Close call but not unanimous
ASB sees any OCR decision on July 8 as a close call, but it expects the RBNZ to put it on hold.
However, it doesn’t expect the decision to be unanimous, with a split vote highly likely again.
The bank’s chief economist Nick Tuffley says the change in its OCR call has been motivated by two key factors.
First, recent US-Iran developments, while fragile and uncertain, appear to be consequential.
“They look to have reduced upside risks to New Zealand’s medium-term inflation by lowering the risk of sustained cost shocks filtering through into wider price and wage settings.”
Second, and as a consequence, the hurdle for the internal Monetary Policy Committee members (who hold the balance of power) to switch their vote for an OCR increase does not look to have been cleared.
“These members will want to wait for more confirmation of potential medium-term inflation impacts before deciding to move the OCR. We think this hurdle, at its earliest, can be cleared by the September MPS,” Tuffley says.
He says the bank’s core view remains that monetary policy settings will need to be normalised and the OCR raised towards neutral levels (something in the ballpark of 3.25%).
It has pencilled in a sequence of steady 0.25% hikes from September with the OCR ending this year at 3% and peaking at 3.25% by early 2027.
This is conditional on ASB economists’ reading of the current outlook that assumes the OCR needs to get back to a more neutral level at some point over the next year.
Tuffley says in this gyrating environment the range of risks is spread across an earlier start and still-rapid tightening through to a more gradual pace of increases to a more moderate peak.
Cash rate needs to get back to neutral quickly
Picking the appropriate settings for monetary policy is not getting any easier, says the BNZ.
“Sure, the war may be over, but the world is hardly stable, and domestic fuel prices are still well above where they were at the start of this year,” Stephen Toplis, BNZ research head says.
“Additionally, it shouldn’t be forgotten that prior to the war inflation concerns were already building and there was a strong argument for higher interest rates even without an oil price shock.”
No matter how this all plays out, Toplis says the bank is strongly of the view the cash rate needs to get back to neutral relatively quickly to ensure stimulatory monetary policy does not add to inflation.
When the cash rate hits neutral then the RBNZ can ponder the nature of the inflationary pressure and determine what needs to be done next, he says.
At this stage the BNZ is keeping with its projection of further rate increases after July but, equally, it may be that the course of events dictates the central bank can stop tightening at a lower cash rate peak than it is currently expecting.
Tuffley says the difficulty is ascertaining what the RBNZ Monetary Policy Committee will say to ensure that it gets the “right” policy outcome while maintaining its consistency with what was written when it released its May Monetary Policy Review.
At that review the RBNZ stated: “The Middle East conflict has materially altered the outlook and the balance of risk for inflation and economic growth.”
This change appeared to be the dominant rationale for the RBNZ’s decision to adopt a more hawkish stance than was previously the case, he says.
“So, if there is no longer a Middle East conflict does the RBNZ throw the car into reverse and go back to its no rate increase until late 2026 stance?”
Supporting such a view is the fact that it looks like the labour market will be weaker than the RBNZ had assumed and, clearly, inflation (at least in the near term) will be lower than the RBNZ had anticipated.
More generally, the BNZ thinks the RBNZ will lose some credibility were it not to raise rates next week. “After all, half the committee wanted a rate increase at the last meeting and both they and the other half confirmed they were comfortable with at least three rate increases before the end of this year,” Toplis says.
“In our opinion inflationary pressures could not have dissipated sufficiently to deter the July increase that has been so well signalled.”
Key player in housing market
Cotality chief property economist Kelvin Davidson says despite the OCR being only one part of the overall housing market equation, the Reserve Bank still remains a key player in how the rest of the year pans out.
“All eyes will be on the OCR decision next week, with the odds of a rise perhaps having lessened as the peace deal plays out and fuel prices drop.
Another 3-3 stalemate of Monetary Policy Committee members in terms of individual votes could see rates held.”
Davidson says even if the OCR stays unchanged in July, an increase or two still looks likely at some stage this year – which was the expectation even before the Iran conflict began.”
“Mortgage rates themselves have stabilised recently, and there may not necessarily be much additional upwards pressure in the near-term.
“But people are probably sensibly still looking at longer-term fixed rates regardless, as insurance against any further upside as we move later into 2026 and beyond.”
In terms of the property market, he says sellers aren’t generally under much duress, and buyers aren’t really rushing either. Listings remain elevated and these conditions suggest a continuation of recent, subdued price patterns in the coming months.
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