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The Reserve Bank of New Zealand downgraded prospects for a 2024 rate cut and shifted its forecast for the peak rate higher, following the Monetary Policy Committee’s decision to hold the Official Cash Rate at 5.5% on Wednesday.
The overnight index swaps market was 4-9bp firmer across meetings after the decision (See NZGBS: Cheaper After The RBNZ’s Hawkish Hold) – the MPC’s fifth consecutive pause – with the market now pricing in a slight chance of a July 2024 cut at the earliest. The pause was widely anticipated. (See MNI RBNZ WATCH: MPC To Consider Pause As Inflation Falls)
Updated forecasts also upgraded the Reserve’s expectation that the OCR would peak at 5.7% by the June quarter 2024 – implying close to a 75% chance of a further 25bp rate hike – up from the previous 5.6% peak by Q1, and will likely stay there until Q2 2025. The August forecasts had factored in a small chance of a December 2024 cut. (See charts)
HIGHER FOR LONGER
At a press conference following the publication of the November Monetary Policy Statement, Governor Adrian Orr noted projections had changed little over the last 18 months. “We talked about the OCR being at this level and for some time to come,” he told reporters. “That message has been loud and clear to people and I think it's been heeded.”
He noted that while credit growth had slowed rapidly, households had yet to feel the full effect of higher rates. “We're still only two thirds of the way through that rollover in the mortgage book,” Orr added. Mortgage payments will rise to about 20% of disposable income from 15% between now and its peak in 2024, he continued.
Orr stressed that the RBNZ wanted inflation expectations to fall significantly and remain well-anchored before the MPC entertained an OCR reduction. The committee would also want to see improvements in global inflation and lower government spending. “We're looking for a package of things that says, ‘demand growth in this economy is going to be slow enough to enable the inflation pressures to come out,’” he explained.
GROWING CONCERNS
Chief among the RBNZ’s concerns were housing-market growth, increased population and immigration, and rising fiscal spending.
Government spending and investment and total spending in the economy drove the higher inflation profile within the forecasts. "And that is largely driven by the growth in the population," he continued.
"We're in a really challenging period for monetary policy where per capita consumption is actually declining as a level but overall consumer spending is rising because there are more people, more New Zealanders." The RBNZ has in the past viewed population growth as neutral to inflation.
The MPC next meets Feb 28.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.