The Reserve Bank left the Official Cash Rate (OCR) unchanged at 5.50% at its monetary policy review on Wednesday, ending almost two years of consecutive rate hikes.
“The level of interest rates are constraining spending and inflation pressure as anticipated and required,” it said in a statement.
Economists and traders had agreed the central bank would not increase the benchmark interest rate at its July meeting, as foreshadowed in its May Monetary Policy Statement.
The Monetary Policy Committee had increased the OCR in every review since October 2021 before today.
During that time, the cash rate was increased 525 basis points in a dozen consecutive decisions and is now at its highest level since late 2008 at 5.50%.
In May, the RBNZ said it believed interest rates were high enough to bring inflation back into the target range and signalled it would freeze the OCR until mid-2024.
On Wednesday, it said global economic growth remained weak and inflation pressures were easing following significant monetary policy tightening.
'Feeling comfortable'
Stephen Toplis, BNZ’s head of research, said the central bank would be “feeling comfortable” about the data released since May.
First quarter gross domestic product was weaker than expected, the quarterly survey of business opinion showed the labour shortage easing, while pricing intentions and inflation expectations have fallen.
However, some analysts are still predicting another 25 basis point hike before the end of the year. Markets were priced for an increase by November.
This view could be encouraged (or discouraged) by a Consumer Price Index (CPI) data release next week, which is likely to show an annual inflation rate of around 6% in the second quarter.
Annual inflation was running at 6.7% in the first quarter of 2023 and has been as high as 7.3%.
The Reserve Bank said it expects headline inflation to continue to decline from its peak and core inflation to also fall as capacity constraints ease.
“While employment is above its maximum sustainable level, there are signs of labour market pressures dissipating and vacancies declining,” it said.
The New Zealand economy is visibly starting to slow. GDP data puts NZ in a technical recession and the Crown Accounts are $2 billion short in tax revenue due to weak corporate profits.
Even employment is starting to waver, a recent Treasury economic update said some industries which had GDP contractions are now showing a fall in job growth.
Employment has fallen 1.1% in the professional, scientific, and administrative support services sector — which had the largest GDP contraction in the March quarter.
Similarly, the number of jobs in the manufacturing sector fell 0.3% in the May month after its GDP output contracted 1.1% in the March quarter.
The RBNZ said consumer spending growth had eased and residential construction activity had declined, as house prices had returned to “more sustainable levels”.
“More generally, businesses are reporting slower demand for their goods and services, and weak investment intentions,” it said.
The monetary policy committee said it was confident that CPI inflation would return to its 1% to 3% target range with interest rates remaining at a restrictive level for some time.
Market participants were expecting Wednesday’s decision and therefore the reaction was mild.
Swap rates were down roughly four to eight basis points across the curve and the New Zealand dollar was slightly higher, according to ANZ.
The central bank’s next Monetary Policy Statement will be published on 16 August. It then has one more policy review before the general election in October.
Its final opportunity to increase the OCR before February 2024 would be at the November monetary policy statement, as there is no policy review during the summer.
Sustainable house prices
The committee said that house prices had returned to more sustainable levels after recent falls.
“Higher net migration is supporting demand for housing but higher interest rates continue to exert downward pressure on housing demand,” it said.
House prices have stabilised in recent months and the committee said the outlook had become more balanced.
Sharon Zollner, chief economist at ANZ Bank, said this was a hat tip to housing data which had been firmer in recent months.
The committee's comments were an acknowledgement that the RBNZ’s forecast for house prices to continue to decline across the rest of the year now looks too pessimistic.
“With real house prices adjusted for income growth back around 2019 levels, that statement seems a little inconsistent with the debate that was raging back then. But what ‘sustainable’ means is a bit vague, providing some wriggle room,” Zollner said.
The RBNZ's full statement is below.
Official Cash Rate remains on hold
12 July 2023
The Monetary Policy Committee today agreed to leave the Official Cash Rate (OCR) at 5.50%.
The level of interest rates are constraining spending and inflation pressure as anticipated and required. The Committee agreed that the OCR will need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1 to 3% annual target range, while supporting maximum sustainable employment.
Global economic growth remains weak and inflation pressures are easing. This follows a period of significant monetary policy tightening by central banks internationally. Global inflation rates continue to decline, assisted by the normalisation of international supply chains, and the decline in shipping costs and energy prices. The weaker global growth has led to lower export prices for New Zealand’s goods.
In New Zealand, inflation is expected to continue to decline from its peak, and with it measures of inflation expectations. Core inflation is expected to decline as capacity constraints ease. While employment is above its maximum sustainable level, there are signs of labour market pressures dissipating and vacancies declining.
Consumer spending growth has eased and residential construction activity has declined, while house prices have returned to more sustainable levels. More generally, businesses are reporting slower demand for their goods and services, and weak investment intentions.
The return of net inward migration continues broadly as anticipated, and is assisting to ease labour shortages. The net impact of immigration on overall capacity pressures remains uncertain. The ongoing recovery in tourism spending is supporting demand.
The repair and rebuild underway in regions of the North Island due to severe weather events will support economic activity in the near term. Broader government spending is anticipated to decline in inflation-adjusted terms and in proportion to GDP.
The Committee is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range of 1 to 3% per annum, while supporting maximum sustainable employment.
128 Comments
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by Future | 7th Oct 22, 2:34pm
The Seal has been Broken. This is how the Scroll reads.
Interest Rates will continue to go Up from here and Stay Up for a Long Time.
Banks will sell Mortgages at 10% +. ( Double Digits ). The OCR Forecast Peak Goalposts will continually be Moved Higher and Higher ! 10% Interest Rates Next Year, Guaranteed !
Hi NB, interesting question, I used to own a holiday house in Pauanui, so not far from Whangamata at all, I sold it two years ago. Whanga is a great spot but I think values will fall further because:
1) when times get tough, holiday spots generally don't do well, and I think there is more economic pain ahead of us.
2) the weather patterns (deluge, land slides etc…) are keeping buyers away and especially SH 25A being closed for another… at least 1 year, possibly more is a real problem for Pauanui, Tairua, Whangamata as it was the main and shortest access route.
IMO, wait for at least one more year, but probably longer.
At the very least it looks like they'll stay high for longer. The heavily indebted have got quite a load on their shoulders. This will be quite a test over the medium term. Great for the patient FHB saver! Start making lowball offers from early 2024.
ANZ Chief Economist Sharon Zollner “The Reserve Bank’s current forecast, which was not formally updated on Wednesday, suggests the next move in the official cash rate will be downwards, with the first cut tipped around the end of next year” https://www.stuff.co.nz/business/132530888/reserve-bank-leaves-official…
Ms. Zollner is ANZ's chief economist. (Not ANZ chief executive Sharon Zollner as you said.) Her other title is: Chief Spinner of "the economy according to bank economists". I was going to say chief liar but that felt just a little too close to the bone given that she's said some nice things about what a woeful weapon the OCR is.
And no - RT - I'll not pretend you are just "re-quoting" what Stuff said. YOU know she's not the CEO. Shame on you!
It is good some at the ANZ Follow The Prophet.
In the above you tube post John Key agrees with the prophet and says we may see 10% interest rates.
But he now works for ANZ , so as you say we have to ignore everything he says and assume the opposite. Nothing he says us his own genuine opinion and he is just toeing the line of the man. Right?
Retired-Poppy , when you say:
At the very least it looks like they'll stay high for longer.
What do you base that assertion on? I'd like to hear your reason as I vehemently disagree.
1) market doesn't quite believe that RBNZ done hiking (not affected by yesterday's hold, as essentially no one thought otherwise, and 2) as you have indicated, offshore influences, mainly US, which are now in the process of recoupling with the reality that the fed is probably done, except for maybe one more small hike.
Wholesale rates are pricing in OCR rises and banks will follow them up. Market was betting on a small raise, and the non-surprising OCR would suggest one of two things; wholesale rates pair back a little or bank rates move up a little. I think the comment was a reflection on the fact the there's been no downwards movement in wholesale rates so far.
Predictably, US treasury yields have reached the top of their recent range and are on the way down again after a massive overreaction to hot ADP data, later shown to be wanting. We follow suit as per usual. Hawkish talk by Powell and co is likely to lack follow through, maybe one more hike, but that should be it.
RBNZ led to the top, and will lead on the way down, sooner than they are currently saying.
re ... "Why are we now predicting a slow and incremental decline in economic conditions?"
A rhetorical question? No. It will be rapid and painful.
Even David Hargreaves expected the "slump" to appear in the second half of the year. Some of us were far less sanguine.
It is departure form the recent "goldilocks" OCR rates that destroys. (Ignore the morons that say the "average" rates were xx% and we're just returning to normality. It is the recent average that counts. And these had the OCR around 3.5%)
This is a political move at least as much as an economic one. Orr is essentially trying to temporarily save an inept, money wasting Government from the consequences of its own mistakes.
It is interesting that the RBNZ has not mentioned the recent attitude-tightening of both the European and the US central banks, which will ultimately force the RBNZ to respond in kind, in order to avoid an escalation of imported inflation due to a potential serious weakening of the NZD.
While the OCR cycle is reaching its peak, this is not the end of it yet: Orr will be forced to raise the OCR at least another time, soon after the elections.
Have to agree, RBNZ are meant to act on inflation - inflation is still high (and as Orr is so fond of looking ahead) will likely increase next quarter due to the fuel subsidies alone.
Of course I still challenge the whole rates control inflation theory, so on that basis who cares what they do.
It would appear that like it, or not, we just ride the pendulum rather than exert any external control on it.
TVNZ is getting in on the action with the lead story on One news a few nights ago being how over the next few months homeowners will be rolling over onto the new higher interest rates. It is just frustrating home some of the commentators and influencers in NZs mainstream media are saying how interst rates have topped out, when infact anything could happen.
By that stage - with the economy tanking, and mortgagee sales mounting, and builders going to the wall while businesses around us disappear and retail centers look like central Chicago ... The RBNZ will (and not before time) "look through" the inflationary effects. We'll call this COVID-Part-2.
I think the conversation has turned from “how high?” to “how long?”. And I do hope for longer simply because that’s a scenario where we’re somewhat coping. Some will not be, and that’s not good, I don’t wish that on them. But the alternative is a deflationary environment and rate cuts sooner, where many won’t be coping, and that’s worse for more people.
We can sustain higher rates with better allocation of spending. In fact, that’s likely to ease rates lower in the long run with a higher tax pull. Cutting spending now will throw us under the bus.
Looking ahead, we will reach a stage where the country is hurting too much, when too many businesses have to close shop and too many employees lose their jobs. When that time comes, whether inflation is less than 3% or not, the RBNZ will lower the OCR again, not because I say so, but because it's the path of less immediate pain. I actually think that, if inflation remain too high, central banks will raise their "target rates", we shall see...
Yea, that’s my scenario two. The “too much hurt”. I think there’s a way of less hurt, it’s just less palatable to voters as we have to choose it rather than wait for it to happen. It comes with alternative tax and spending, but we as a nation don’t seem interested. We want the asset bubble without the burst thanks.
Low rates for years is mainly why inflation went higher at 5.5% rates arei still very low historically. The mess caused by super low rates will take years to clear up hard to believe the stupidity of considering negative rates a few years ago. If any central banks start lowing rates again inflation will explode, Yvil you should embrace higher rates as this will be the norm many people who purchased property at ridiculous over valued price’s will be paying for years, negative equity will be a huge financial burden for many.
18 months ago, the OCR was then at what was seen as the appropriate level to contain CPI within the mandated 2%-3% range. That OCR level was 1%.
Yet here we are at 5.5%, another level seen as appropriate to 'get back' to the mandated level.
Let's hope the RBNZ is right. Because if it misses its objective by a similar margin to the topside again - where, quite frankly, the real risks lie, then 5.5% is going to look just as naive at that time as 1% does today.
Given no party wants to address taxation, and we're still issuing currency like there's no tomorrow ($8.5b deficit), costs and prices are still increasing, expect higher interest rates for longer. At least until things break, then it's everyone for themselves.
Edit: for the hopes of a reduction in spending, there's not a lot of fat to cut and this only transfers the government deficit from their pockets to ours.
"Let's hope the RBNZ is right." is always the case, its just an educated guess really. They have got it pretty right over the last 30 years, the fact that we consider 7% inflation as high is a testament to how well they have done, inflation over 10% was common beforehand. Check out this chart (change to MAX): https://tradingeconomics.com/new-zealand/inflation-cpi#:~:text=Inflatio….
There wouldn't be an election coming up?
There are a lot of moving parts out there at the moment, so I think that it is very hard to say what is going to happen.
I do not think that we have seen the full effect of wage pressures yet and a lot of overseas countries are still very hawkish. On that basis our banks may find it very hard to obtain money if we fall behind foreign interest rates. Who wants to lend to a small country with a hugely overvalued property market, when you can receive higher interest rates from far more secure economies? What would be the consequences if the property slide turned into a crash. Sooner or later that is going to happen. Ponzie schemes always crash. We would be better to manage this in a controlled manner on our own terms. Maybe this is the opportunity?
Due to the signal (couched in RBNZ speak) in the May MPC holding it at 5.5% wasn't really surprising at all.
Translating the RBNZ speak this time (which some didn't get last time):
"The level of interest rates are constraining spending and inflation pressure as anticipated and required."
Translated is that they think that this level of the OCR is working and it is anticipated that it is sufficient to bring inflation down.
"The Committee agreed that the OCR will need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1 to 3% annual target range, while supporting maximum sustainable employment."
Translated they are saying it is likely to remain at this level for the foreseeable level but they are not necessarily ruling out a possible future rise if needed.
This very much contrasts with earlier MPC statements of the past year or so when RBNZMPC statements have explicitly signaled the likelihood of future rates.
If I was either taking on a mortgage or rolling one over; while there is no certainty, my take is that the OCR is likely to stabalise although there is some possible upside (however RBNZ think that the current level is doing the job).
I would go along with Zollner that we are not likely to see any easing until well into 2024.
For me, I'm certainly taking good notice of RBNZ (who determine the OCR), and Zollner Chief Economist at ANZ (who set mortgage rates).
However, there is no certainty - just what is signaled as being more likely - and I will be watching future CPI and other data.
Dgm
You really rate yourself so I’m intrigued in knowing a little about you.
Interested to know what experience you have had in the economic field, who do you currently work with and their qualifications, who you liaise with, a little about the data you get and your research team . . . all those types of things.
It’s just that I have this deep seated impression is that you are just some uneducated anonymous keyboard warrior with little else than a big ego and that it is you that is the one who actually lives in a cave.
Cheers :)
It means the balance sheet can be sustained at this level with the current policy settings and the issuing of currency via bank loans and negation of this currency via interest is neither significantly inflationary nor deflationary. If we want affordable houses, that's policy. That's what we should vote for. Best way to vote is not to buy, but I can't see that happening any time soon. I certainly wouldn't be jumping at the bit for a property at the minute knowing the growing discontent among our voting aged population.
$2,245 a fortnight to buy the average NZ house ($891,585) with a 20% deposit ($178,317) over 30 years at ASB's 1yr rate (7.25%). Sustainable?
The median rent is $1150 a fortnight, so buying the average house costs almost twice as much as renting the average house, and that is after you spend $178,317 on the deposit. On what planet would that ratio be sustained?
Because house prices are currently stuck in a 2.5% interest rate setting.
That $2,245 per fortnight becomes $1,300 per fortnight at 2.5%. Much more manageable and comparable to renting. Sure, rates & insurance on top of that but some would argue a short term premium to owning a home.
My translation:
We've screwed the economy. You can't see it yet - but we can.
Even though it was our fault - We're not sorry. We are un-accountable - so bleat all you like.
We over-reacted. But we're not sorry.
We'll keep interest rate high until all those who have to re-fix - have re-fixed. It would be unfair of us not to screw everyone equally.
That means the first cut to the OCR - the tool we use to ensure older, wealthier people stay wealthy - will be March '24.
Suck it up, buttercups. We answer to no one.
True that..... RBNZ forcing us to pay for their own mistakes
Show me a homeowner who's happy that their mortgage payments have increased by 60% or more... due to the govt debt blowout and the RBNZ's response...
Shame you can't vote out the RBNZ chiefs... seems central banks are immune to democracy when they make decisions that affect everyone
Let me help ...
"High interest rates" are judged by the recent normal. I.e. the last sustained goldilocks period where they were not too high and not too low.
In NZ's case that's an OCR about 3.5%. (for about 10 years pre-covid)
So with an OCR at 5.50% - about 2% above normal - that's high.
These twats who claim an OCR at 5.5% isn't high enough are full of b.s. - Most people can't see this yet. In a few months, the destruction will be obvious.
An OCR of 3.5% combined with a suitable debt to income ratio would prevent asset inflation. But how could people generate wealth if we didn't saddle the young with temporarily cheap debt? Switch the interest rates back up once the transfer of wealth is complete so the asset values crash and those who cashed out are then paid dividends in their term deposits from those young mortgagor's increased mortgage interest payments.
Current inflation is NOT too high. In fact its likely within their range or close to it.
Its just the way they measure inflation is "Lets take the inflation figures from the entire last year and average it to now, so that we know what to do going forward".
If they were in the sharemarket, they would never make any money. Its like me making a decision about how much I spend based on the average balance of my account over the last year, and ignoring the current balance. Yes, its that stupid.
As I said, debt servicing COST increases relative to income is the issue.... not interest rates...
You can say interest rates are not high, but when they were high house costs were also 5% of current house costs - so its all relative to cost of living
Paying 40-60% of your household income to pay mortgages seems pretty hefty by anyone's standards and gone are the days of having 1x bread winner for the entire family unless you're lucky enough to be in the top 10% of earners
Now you need 1x breadwinner just to pay for the mortgage...
Show me a homeowner who's happy that their mortgage payments have increased by 60% or more... due to the govt debt blowout and the RBNZ's response...
Me, actually. We'd like to upgrade someday and the price difference to the "next" level was insane. People who thought 2% rates would last were bidding prices to the moon and you'd have to be nuts to follow. Bring down the prices please, and the rise in rates is worth it.
I've never understood why people like their personal residence going up in value. Unless you are leaving the country or retiring to the West Coast, it just means a larger mortgage and more debt on your next house. When you are looking to move, lower prices all round are preferable. Assuming you can sell your house of course.
No they didn't. Plenty may have said they now did but didn't commit to putting it down on here. Anyone getting anything wrong on here gets roasted. So another announcement before the election are you going to have a go at that one or just wait until after the announcement ?
The level of interest rates are constraining spending and inflation pressure as anticipated and required. The Committee agreed that the OCR will need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1 to 3% annual target range, while supporting maximum sustainable employment.
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