RBNZ would not want mortgage rates to fall any further – BNZ

BNZ economists believe the Reserve Bank would not want to see mortgage rates fall any further for now, following the recent flurry of mortgage rate reductions as banks responded both to competitive pressures and the easing of wholesale interest rates.

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These falls come after some very sharp increases in mortgage costs over the past year as banks have reacted to the OCR hikes as well as to some very strong earlier rises in wholesale interest rates.

With RBNZ set to make another rate decision on Aug. 17, it is virtually universally expected that the OCR will be lifted by another 50 basis points (to 3%), but there’s a growing feeling in markets that it could peak at around 4% late this year and then be reduced again next year, interest.co.nz reported.

This is despite current 7.3% annual inflation and a very clearly signalled intent by the RBNZ to reduce that rate and curb “inflation expectations.” That was partly due to the higher mortgage rates seen in the past year. Higher mortgage payments restrain spending and take steam out of what has been a very hot economy, which in turn, results in inflation.

In its May Monetary Policy Statement, RBNZ tipped the cash rate to end this year at around 3.5% before hitting a peak of around 4% in June 2023.

While RBNZ predicted the OCR to peak in mid-2023, it didn’t forecast any falls until the second half of 2024. And this is where market opinion is now diverging somewhat, with some predicting earlier falls than that, interest.co.nz said.

Writing for the weekly BNZ Market Outlook publication, Stephen Toplis, BNZ head of research, said the market’s “desire” to price in rate cuts next year is one of the tricky aspects facing RBNZ.

“This is particularly pertinent given recent falls in home mortgage rates,” Toplis said, adding that he didn’t think the central bank would want mortgage rates falling any further “any time soon.”

Next week’s OCR decision will come along with a new Monetary Policy Statement from RBNZ that will include an updated forecast track for the cash rate.

“Sure, the cash rate [OCR] should fall back towards neutral in due course but it is unlikely the Bank [RBNZ] would want to indicate any material decline within twelve months of rates reaching a peak,” Toplis said.

He is expecting, therefore, that in the new cash rate forecast, RBNZ will retain a “peak” to remain in place for around an 18-month period.

“In our opinion, the Bank [RBNZ] should be forceful in trying to dissuade those who are currently driving market pricing of such an easing,” Toplis said. “Realistically, however, pricing is as much about investors, particularly offshore, believing New Zealand’s yield curve must have a similar shape to the rest of the world irrespective of the local idiosyncrasies. It’s always hard for the central bank to stand in the way of offshore momentum.”

BNZ economists are expecting a 50-point increase in the OCR next week followed by 25-point increases in the next two reviews in October and November.

Read next: Mortgage rates tipped to rise up to 7.5%

“We have been tempted to increase our October call to 50 but simply have not found any justification in the data to do so,” Toplis said. “And we are always conscious of not being data-whipped by the noise in the published figures. If, however, the RBNZ is adamant it will go 50 again in October then we will probably adjust our track accordingly.”

Toplis said the market is now mulling whether RBNZ:

• will give a clear indication that it intends to increase by 50 basis points in October,
• will indicate an intention to deliver two more consecutive 50 point increases this year (October and November), and
• what will it print as its terminal (peak) rate.

“In brief we think:

• possibly,
• it shouldn’t, albeit that it won’t want to provide the market with any excuse to rally,
• same again, around 4.0%.”

Toplis said he still thinks the cash rate need not hit 4% to achieve RBNZ’s required outcomes but sees no reason why the central bank would want to change its most recent forecast of 3.95% given the evidence it has received to date.

“With two meetings, after the August one, before the end of the year, we doubt the RBNZ would want to rule out the possibility of a further 75 basis points of hikes during that period so it will likely signal this, leaving a further 25 points for next year,” Toplis told interest.co.nz.