CoreLogic and Infometrics comment on central bank's decision
The Reserve Bank of New Zealand has once again decided to keep the OCR unchanged at 5.5%, saying the “New Zealand economy is evolving broadly as anticipated.”
Kelvin Davidson (pictured above left), CoreLogic NZ chief property economist, said the RBNZ’s latest rate decision “will have surprised very few people.”
“Inflation and inflation expectations have continued to show encouraging signs of a slowdown, and there have also been a few hints of a looser labour market too, partly thanks to high net migration,” Davidson said.
The central bank’s latest OCR decision as well as its outlook for inflation and GDP remained largely unchanged to its May forecasts, with the GDP anticipated to grow moderately, unemployment to edge upwards, and inflation to slowly fall.
But the little changes made by RBNZ to its forecasts, according to Brad Olsen (pictured above right), Infometrics CEO and chief economist, signalled a strengthening in its view that “interest rates will need to remain higher for longer” to tame inflation.
RBNZ has upgraded its expectation for house prices markedly, with RBNZ now forecasting a 9.5% increase in house prices over the two years to the end of 2025, compared to just 0.4% previously.
“The bank’s view of stronger house price growth than previously could pose an upside risk to inflationary pressures and require a stronger OCR response than we are currently forecasting,” Olsen said. “Higher house prices have seen private consumption growth forecasts upgraded from mid-2024, and the outlook for housing will remain in key focus over the next few months.”
CoreLogic agreed with RBNZ’s view that the house price downturn is now essentially over, but that the upturn could be pretty subdued, with prices potentially still below their previous (2021) peak in 2026.
“Our caution about the next phase for the housing market [stems] from the fact that affordability remains stretched, mortgage rates aren’t likely to drop much for another six to nine months at least, and there’s also potential caps on debt-to-income ratios looming in early 2024 as well,” Davidson said.
The CoreLogic economist also acknowledged that many economic variables have moved quicker than anticipated post-COVID.
“The combination of low new listings flows each week, but rising sales volumes means the level of housing stock on the market is declining,” Davidson said. “This could potentially trigger some more abrupt competitive price pressures amongst buyers than we’re currently anticipating, although in turn this would tend to bring forward more listings and mitigate some heat for prices.
RBNZ also changed the timing of the potential first cut in the OCR, from later in 2024 to potentially early 2025 – a change, which Davidson said, “seemed to just reflect a technical tweak, around where they think the underlying level of the ‘neutral’ OCR now sits.”
The central bank has also revised its peak OCR rate from 5.5% to 5.59%, which according to Infometrics, indicated a stronger potential for a further increase to the OCR at the end of 2023 or early 2024.
“The bank made clear that it believes the path the economy is currently taking is in line with its expectations, and consistent with inflation returning to within the 1-3% target band by the end of 2024,” Olsen said.
“The slight increase in the peak OCR doesn’t show a change of view from the Reserve Bank that there definitely needs to be further increases to the OCR at the end of the year, but the slight lift does imply that the Bank now thinks there’s more of a probability of a raise than before. Infometrics is sticking to our view for now that there will be no further increases to the OCR.”
Davidson said the latest OCR decision was uneventful and the implications for the housing market “pretty neutral.”
“But those with an existing mortgage due to be repriced from an older/lower rate up to current levels in the coming month or two will certainly be pleased to see the likelihood of a stable OCR for the next little while at least,” he said.
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