Another increase to the Official Cash Rate (OCR) is not necessarily more likely than not even though the Reserve Bank raised its outlook for the OCR in Wednesday's Monetary Policy Statement, Governor Adrian Orr says.
As expected, the Reserve Bank held the OCR at 5.50%, but surprised Reserve Bank watchers by increasing the OCR track to 5.69% by September 2024 from 5.59%.
Asked in a media conference whether this implies another OCR increase is more likely than not, Orr said no.
"No, we retain optionality throughout. We are showing an upward bias to the interest rate, but it's not a probability, yes or no. That is the pricing of markets saying 'we're not sure, is it 50/50, is it more than that or not'," said Orr.
"Why do we have an upward bias to our inflation projection? Because we need to balance the risks to meeting our remit...the risk to inflation in this country is still on balance more to the upside than down relative to our outlook."
"Let me be clear; inflation is declining. Where we are nervous is, is it declining fast enough for us to succeed in the lowest cost fashion to the rest of the economy? When we start from a very elevated level of consumer price inflation, we have limited headroom to absorb additional inflation surprises. We have a lot more headroom to absorb disinflation surprises from this point, and that's the reflection we're giving," Orr said.
"We have been projecting for some time now to be at least holding the Official Cash Rate at these levels through calendar next year."
The annual inflation rate, as measured by Statistics NZ's Consumers Price Index, dropped to 5.6% as of the September quarter, from 6.0% in June 2023 and a peak of 7.3% in June 2022. The Reserve Bank's remit has it targeting inflation between 1% and 3%. The Reserve Bank is, for now, also required to target maximum sustainable employment. Unemployment rose to 3.9% as of the September quarter, up from 3.6% in June and the low point of 3.2% in September 2022.
"Forward-looking indicators of the labour market suggest further easing is likely at the end of 2023, although demand for labour is mixed across industries," the Reserve Bank said.
Orr said the Reserve Bank was "to an incredible degree" trying to lean against the market and push back at banks reducing mortgage rates.
"I would say we have an incredible influence over the level of borrowing rates in the New Zealand monetary circle, and we are saying that they need to be at this height for a long time to come. If banks want to take risk and bet against it otherwise or not, that's their competitive desire. We know what we're doing," Orr said.
The Reserve Bank started increasing the OCR from tis record low of 0.25% in October 2021. It has held it at 5.50% for four straight reviews now, since a 25 basis points increase in May this year.
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22 Comments
Just because the OCR can be reduced doesn't mean it should. Now that the employment target is being removed from the RBNZ mandate, one is left wondering what levels of unemployment now lie in the future and what will the flow on effects to asset prices be.....
2024......??
Me too. I think there will be 1-2 cuts.
If the landing is hard, possibly 3 or 4, although that’s not my base case.
My probability estimates:
No change - 20%
1-2 cuts - 65%
3-4 cuts 15%
Note: 1-2 cuts will be nowhere near enough to properly restart the housing market
"That is the pricing of markets saying 'we're not sure, is it 50/50, is it more than that or not'," said Orr.
"We know what we're doing," Orr said.
Joke of the year. Most commentators here would love to do horribly at their jobs and get double the pay and a 5 year tenure for the trouble, and there are a lot of middle New Zealanders who aren't happy with his performance also. Plonk him and Robbo in shearing sheep or something of the sort, earning a normal wage and paying median rent and perhaps then they would have more of a connection with the importance and impacts of their roles in relation to whom they are supposed to serve.
Now that the House of Seven Houses is in charge. Who cares about unemployment or interest rates for that matter. The state will step in to make sure the tenants can still pay the rent and interest deductibility is back. So someone on 140k salary with 1 million of investment property debt can drop there effective mortgage interest rate from 7% down to 4.7% by claiming the 70k of interest as an expense against the last 70k of income.
Just make sure you load all of your debt onto the rental properties and not your primary residence. Keep the Proles in their place. Owning nothing and happy watching Love Island.
Most with multiple properties are - by charging every bit of home reno, home appliances, lawn mowers, carpets, drapes, vehicle running, phones, internet across the 7 house portfolio.
And there is no law saying you cannot have your company owning your residence in the pool of seven houses - with interest deducted.
Well that's embarrassing. I forgot about the ringfencing. The House of Seven Houses will be saving that rollback for later. But even so a landlord with a good equity position can apply the interest loss against income on the whole portfolio. So they can add additional properties and mortgages and then offset the interest on the rent they receive on other properties that don't have any debt. Excess losses can also be carried forward and used in future years to offset rental income. Seven houses would probably be a reasonable sized portfolio to make this strategy work.
The more the markets fight against Higher For Longer, the greater the likelihood of interest rates being raised further.
https://wolfstreet.com/2023/11/22/even-higher-for-longer-if-markets-kee…
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