OCR analysis: Finally, we've hit the peak

Housing Market Written by John Bolton, May 24 2023
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Anyone who’s had a listen to Squirrel’s new podcast will know that opinions across the team were pretty sharply divided in terms of how the Reserve Bank (RBNZ) would play things with today’s Official Cash Rate (OCR) announcement. 

At the more hopeful end of the spectrum… My colleague, Chief Squirrel David Cunningham, was sure the RBNZ would take a rain check on any further hikes this afternoon – opting to stick at 5.25% and cut Kiwi some much-needed slack.

(And in fact, he even penned this open letter to Reserve Bank Governor Adrian Orr explaining why, in his view, a ceasefire was the only way to go. It’s well worth a read if you’ve got a few minutes.)                                                              

Me? I was firmly of the view that we’d end up with a 0.25% increase that would take us up to the RBNZ’s forecasted peak OCR of 5.50%.

The thinking behind this was that it just made sense for the RBNZ to go that final step and see through the course they’d laid out for us. But with signs good that New Zealand is starting to get on top of the inflation battle, I was sure that would be it.

And not that it’s a competition or anything, but I was right (… and David was wrong)

The RBNZ has opted to play it down the middle, pushing through a 0.25% increase to take us from 5.25%, up to its peak forecasted OCR of 5.50%.

As part of his commentary, Governor Orr also indicated that we can expect the OCR to stick at that level for the next 12 months, through until the middle of next year – clearly indicating that we’ve hit peak rates for this interest rate cycle (something I’ve been saying for a while now). 

It’s a good outcome, comparatively speaking

I say that in light of the fact that so many bank economists had predicted we were in for another 0.50% increase, and a revised forecast that would see the OCR get as high as 6.00%.

Their argument was that our recent uptick in immigration numbers, coupled with last week’s so-called “expansionary” Budget, would undermine the progress that had been made against inflation, and demand a harsher approach on the OCR front.  

I’d been firmly of the view that going any harder would be an overcorrection, that failed to take into account mounting evidence that inflation is starting to cool, and of just how stretched mortgage borrowers are already (with plenty more still to come).  

It would’ve been disappointing, but it’s also pretty standard practice for Reserve Banks. They have a tendency to over-adjust at both the top and bottom of the cycle.  

My sense, and David’s, was also that immigration will ultimately have a deflationary impact – with the influx of people bringing much-needed labour into the market and helping to eliminate the wage price pressure which had been such a big driving factor of inflation.  

So going any harder would have been extremely tough to justify

And thankfully, the RBNZ has shared that view.

As a result of today’s announcement – and particularly the RBNZ’s indication that we’re now at peak OCR – I’d expect that we’re going to enter a nice, stable period in respect of mortgage interest rates.

It doesn’t mean that the next 12 months aren’t going to be tough for Kiwi mortgage borrowers, as more and more people roll off low fixed rates onto current levels.

But, all things being equal, the next moves from here will be downwards, and hopefully that knowledge will bring some small relief.

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