Reserve Bank announces another 25-basis-point OCR rise today! Has a commercial bank already followed suit?!

Reserve Bank of New Zealand Governor Adrian Orr announces the latest monetary policy today (image sourced online)

 

The Reserve Bank of New Zealand (RBNZ) today raised its Official Cash Rate (OCR) by another 25 basis points to 5.5%. The central bank reiterated that it still considers 5.5% to be the peak for the current OCR cycle and expects the rate to begin falling from the third quarter of 2024.

 

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A strong market reaction

 

Interest rate markets reacted dramatically to the central bank’s Monetary Policy Statement. The two-year swap rate fell sharply from 5.55% to 5.19%, while the ten-year swap rate declined from 4.53% to 4.37%. In bond markets, the two-year government bond yield fell from 5.13% to 4.79%, while the 10-year yield dropped from 4.45% to 4.30%.

 

These market reactions all increased downward pressure on fixed interest rates — in other words, major good news for mortgage holders. ASB was the first major commercial bank to respond, raising its floating mortgage rate from 8.39% to 8.64% and its ORBIT home loan rate from 8.49% to 8.74%.

 

OCR: has it reached the peak of this tightening cycle?

 

Even before the Reserve Bank of New Zealand released its latest monetary policy decision, many economists stressed that despite its previous indication that an OCR of 5.50% would mark the peak of this tightening cycle, various signs pointed to further increases ahead. Since the central bank raised the OCR from 4.75% to 5.25% in April, net migration has continued to rise, while the government released its Budget last week. Both developments have added uncertainty to the OCR’s future path. Previously, 5.5% was widely expected to be the peak for this cycle, but many economists now predict the cash rate could rise to 6%.

ASB chief economist Nick Tuffley

 

With the Reserve Bank of New Zealand working hard to suppress inflation and the economy showing no signs of slowing, ASB had forecast another 50-basis-point increase this week.

 

ASB chief economist Nick Tuffley said today’s Monetary Policy Statement was something of a double-edged sword. He estimated the Budget would provide a 1.7% boost to the economy, but the central bank would still need to keep ‘fighting’ inflation. Higher net migration would help ease labour shortages and put downward pressure on wages, while also stimulating demand for goods and services. Inflationary pressure persists, and monetary policy works with a lag, meaning the central bank could still raise rates further.

 

Similarly, before last week’s Budget, Westpac chief economist Kelly Eckhold had already raised his forecast OCR peak to 6%. This was based on the Treasury’s figure last week of net migration increasing to 66,000 people. Eckhold said New Zealand’s strong labour market continued to attract more people, and Westpac expected annual net migration to reach 100,000 by the end of this year. The sharp increase would lift New Zealand’s population growth rate from 0.5% at the end of 2022 to 2.4% by the end of this year, ushering in one of the fastest periods of population growth in decades and signalling a substantial increase in labour demand among more businesses.

 

Unlike those two banks, economists at BNZ and ANZ both put their forecast OCR peak at 5.75%, and considered another rate rise in June more likely.

 

BNZ head of research Stephen Toplis believed the newly released Budget would be ‘the straw that breaks the camel’s back’, because it would increase inflationary pressure ahead. He expected the central bank to raise rates by 25 basis points both today and in July, taking the peak to 5.75%. Although he opposed further increases, the central bank’s recently demonstrated fear of high inflation meant we were unlikely to see it stop raising rates in the short term.

 

Surprisingly, even Kiwibank, which has consistently taken the most ‘dovish’ stance on inflation control, considered a rate rise today a certainty. Kiwibank chief economist Jarrod Kerr had previously said the Reserve Bank of New Zealand did not necessarily need to raise the OCR above 5%, believing both immigration and the Budget would help contain inflation effectively. Whether today’s OCR increase was 25 or 50 basis points was therefore not the most important aspect of this monetary policy decision.

 

 

Opposition to rate rises from the mortgage market

 

Recently, David Cunningham, the newly appointed chief executive of well-known New Zealand mortgage company Squirrel and former chief executive of The Co-operative Bank, wrote an open letter to Reserve Bank of New Zealand Governor Adrian Orr, stating that there was no need for further interest rate rises in the current financial market.

 

He argued that more and more New Zealand households were feeling the pain of rising mortgage rates, and their repayment pressures would not ease even without an OCR increase. He explained that even if the OCR stayed at its current level, the average mortgage rate paid by New Zealand borrowers would rise to 5.9% next year, as large numbers of borrowers rolled off lower fixed mortgage rates onto higher ones.

 

 

The central bank had said it hoped to push unemployment up to 5% to help contain high inflation. Increased net migration would bring tens of thousands of workers to fill vacancies businesses urgently needed filled, helping ease pressure from high wage costs. Meanwhile, the additional economic demand generated by new migrants’ consumer spending could be negligible.

Cunningham believed that the Reserve Bank of New Zealand should not stifle the economy or put greater pressure on already overstretched New Zealand borrowers to bring inflation down faster, as this would undoubtedly inflict further financial pain on countless families。