The Reserve Bank has stuck to its line in recent months that the official cash rate (OCR) is on hold at 5.5%, and will probably be there for quite some time.
Its own forecasts predict that the rate won’t start to move until next year.
But an increasing number of economists say that the central bank may be surprised at how quickly inflation is brought under control, allowing it to reduce the official cash rate.
ANZ said in mid-January that it expected the bank to start cutting rates in August, and to use a series of 25 basis point cuts to take the rate to 3.5% by the middle of next year.
The bank said people should not be surprised if the Reserve Bank gave no hint that it was even considering that.
“The sensible strategy for the RBNZ is to deny-deny-deny-cut, in a bid to avoid a premature easing in financial conditions that would be hard to haul a dovish market back from.”
Infometrics was reported to also be changing its prediction, to an August cut, joining ASB, which moved its forecast to August when it updated its prediction in December.
Bloomberg economists have said even that might be too late.
Economist James McIntyre said earlier in the year that the Reserve Bank’s current hawkish stance was unrealistic and would not last long this year.
“The full effects of 525 basis points of tightening since October 2021 are being felt, with the economy contracting, unemployment rising and inflation cooling. [Bloomberg] expects the boost from strong migration will fade fast in early 2024, and a shift in economic reality will drive a policy pivot. Rate cuts are likely to arrive sooner than anticipated, in Q124, as the focus switches from fighting inflation to reviving demand.”
But others say that it’s too soon to think about rate cuts this year and inflation that is persistently higher than the Reserve Bank is comfortable with will keep the OCR on hold until next year.
But even while the OCR has been on hold, retail rates have moved. That reflects significant movement in the wholesale market before Christmas.
Commentators have said there may still be room for more retail cuts to come, particularly if those wholesale drops are sustained.
The markets are pricing in OCR cuts from mid-year.
ANZ economists have said that potentially makes it a good time to consider fixing for six months, rather than the one or two years that New Zealand borrowers often go for.
Whether that is the right solution for you will depend on your circumstances, and is a good thing to discuss with us as your mortgage advisers.
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