PHOTO: FILE
A 50-point cut to the Official Cash Rate (OCR) is nearly certain in the coming week, bringing major implications for mortgage rates and the property market in New Zealand.
The Reserve Bank of New Zealand (RBNZ) ended 2024 with what looked surprisingly like a promise. It will kick off 2025 with a delivery.
A 50-point cut to the Official Cash Rate (OCR), taking it down to 3.75%, is universally expected on Wednesday, February 19. Anything else will cause major palpitations in the markets.
That’s because Reserve Bank Governor Adrian Orr was about as explicit as you will ever see an RBNZ Governor be (on interest rates) when he said after the last OCR decision for 2024 on November 27 that the bank’s forecasts were “consistent” with another 50-point cut in February.
It may be that the catalyst for the surprisingly forthright OCR guidance from the Governor was initial reaction to the November 27 decision (a 50-point cut), which was accompanied by RBNZ commentary that the markets and indeed yours truly were regarding as quite ‘hawkish’.
With the next OCR decision at that point nearly three months and one summer away, Orr may have decided he didn’t want to leave people ‘hanging’—and so provided clarity, which sure enough, calmed the markets.
The only thing that could have upended this near-promise of a 50-point cut for the coming week would have been some nasty economic surprise.
And while the GDP figures for the September quarter released on December 19 were quite a shock, the news was largely retrospective and wouldn’t be sufficient to change the RBNZ’s thinking for next week—although it will have certainly caused the RBNZ to re-examine where it thinks the OCR may ultimately need to be.
The Economic Data Has Been Conducive
Generally, the economic data has otherwise turned out broadly as expected.
Inflation as measured by the Consumers Price Index (CPI) remained at an annual rate of 2.2% as of the December quarter—a touch higher than the RBNZ forecast. But the measure of domestic ‘non-tradables’ inflation, at 4.5%, was lower than the RBNZ forecast.
Unemployment for the December quarter came in at 5.1%—exactly in line with the RBNZ forecast.
The closely followed NZIER Quarterly Survey of Business Opinion for the December quarter showed improved levels of business confidence, with subdued levels of inflation and pricing pressures expected.
The Reserve Bank’s Survey of Expectations showed that inflation expectations are now nicely anchored in and around the 2% level the RBNZ explicitly targets within the aimed-for 1% to 3% range.
So, the light is shining bright green for the anticipated 50-point cut to the OCR.
This will mean that come February 20, the OCR will have been dropped by 175 points from the 5.50% cycle high point since the cutting commenced in August 2024.
A Big Deal for the Mortgage Market
Banks began cutting mortgage rates ahead of the first OCR reduction in August, and rates on the most popular (two years and under) fixed terms have been lowered from their cycle peaks by between about 150 basis points and 195 points at the time of writing—bearing in mind that rate tweaks are an almost daily occurrence at the moment.
What that suggests is that the OCR cuts to date—and this includes the assumed 50-pointer in the coming week—have already largely been incorporated into the banks’ mortgage rates.
It therefore becomes of vital interest what indications the RBNZ may give about further reductions to the OCR in the future.
The RBNZ’s current thinking is that the so-called ‘neutral’ rate, at which the rate is neither stimulatory nor restrictive, is between 2.5% and 3.5%. So, at 3.75%, it will still be (just) in ‘restrictive’ territory.
In its November Monetary Policy Statement (MPS) released in conjunction with the last OCR decision of 2024, the RBNZ indicated the OCR may be reduced to around 3.5% by the end of this year, 3.25% by the end of 2026, and 3.00% in 2027.
Some major bank economists want to see a bit more movement than that.
And of course, this is all of very much more than passing interest to the homeowners that collectively have around $370 billion worth of outstanding mortgages.
In anticipation of OCR reductions, the country’s mortgage holders have been fixing for ever-shorter terms. That’s resulted in about 55% (over $200 billion) of the total mortgage pile being either on floating rates or due to be re-fixed in the first six months of 2025.
Over 82% of the entire mortgage stock will have a reset of interest rates this year. Therefore, the interest costs being paid by people will change very quickly after there is a change made in the rates by the banks.
Theoretically, this then puts more cash in people’s pockets, which is then available to be spent and to boost the flagging economy.
The Heat Is On
It all means that the weight of expectations is very much on the RBNZ.
And some of these expectations are coming from the very top.
In a media release on January 22 welcoming the 2.2% inflation figure, Finance Minister Nicola Willis remarked: “Decisions about the Official Cash Rate are a matter for the Reserve Bank but the decline in domestic inflation is good news for people with mortgages.”
And the following day (January 23), Prime Minister Christopher Luxon suggested that the RBNZ (which is independent from the Government, lest we forget) should meet more regularly to make OCR decisions.
The RBNZ will be issuing a new Monetary Policy Statement on Wednesday. And as ever, the first thing that will be read will be the new set of forecasts for where the OCR may go.
Mortgage holders, and you kind of get the impression the Government too, will be very interested to see if these new forecasts show a lower—and faster—OCR track.
There’s a bit of a divergence of views forming among economists as to where things will go from here.
Some see the RBNZ being more cautious after the coming week’s review, while others certainly believe the cuts should and will keep coming through the year.
And the Economists Say…
I’ll leave you with some quick quotes from economists from a couple of the major banks.
ANZ chief economist Sharon Zollner and senior strategist David Croy have pencilled in a low point of 3.5% for the OCR, but say “the risks are currently tilted towards the OCR going lower than that.”
“We expect the tone of the Monetary Policy Statement to be one of confidence that the inflation outlook is benign, while acknowledging upside risks to tradable and thus headline inflation,” they say.
“The OCR track will likely be lower, due to the GDP surprise, but given capacity indicators have been mixed, and taking into account the offset from the lower NZD [NZ dollar] and higher export prices, we aren’t expecting a very large change in the track overall.
“The RBNZ is unlikely to feel the need to once again provide such explicit guidance about where to next, given the next meeting is just six weeks away.
“There’s a paucity of top-tier data between now and then, meaning the market is likely to be reluctant to budge from expectations for a 25 [basis points] cut in April, unless the RBNZ’s tone surprises significantly next week,” Zollner and Croy said.
The Kiwibank economics team have for some time been stridently of the view that the OCR was hiked too high and for too long and have pushed hard for the RBNZ to signal a more aggressive cutting cycle.
“We think the RBNZ’s November OCR track has already proved too hawkish,” Kiwibank chief economist Jarrod Kerr, senior economist Mary Jo Vergara, and economist Sabrina Delgado say.
“And as such, we’re expecting to see the OCR track pushed lower and pulled forward [in the coming week]. That is to say, we expect more rate cuts sooner rather than later.
“Our view remains. We think a total of 125 [basis points] this year, to get us to 3%, is needed… with risk of more. And again, markets have come to agree with us. Originally, following the hawkish November MPS, markets had only toyed with the idea of us getting to 3.25% by the end of year. Now, more recently, markets have us priced to get to 3% by around the third quarter of this year,” the Kiwibank economists say.
“To secure the economic recovery this year, the RBNZ must relax policy settings further. We question, why pause in restrictive territory?”