Reserve Bank keeps OCR at 5.5%: ‘A shot across the bows’

The Reserve Bank has kept the official cash rate (OCR) at 5.5%, and pushed back strongly against a growing market perception that cuts could be to come before long.

It said, while higher interest rates were restricting spending and inflation was dropping, it was still too high, and the OCR will likely have to stay at current levels for some time.

If further inflationary pressure was seen, the bank said, the OCR could have to increase again.

Westpac is now the only bank that is expecting another increase in the cash rate but the Reserve Bank revised up its forecast track for the OCR, predicting a rate at least as high as it is currently, and potentially slightly more, through most of next year.

“In New Zealand, demand growth has eased, but by less than anticipated over the first half of 2023, in part due to strong population growth. The OCR will need to stay restrictive, so demand growth remains subdued, and inflation returns to the 1% to 3% target range.”

Committee members noted that while high levels of migration had helped to ease pressure in the labour market, the increase in population was also adding demand pressure.

Employment was still above its “maximum sustainable level”, they said.

Governor Adrian Orr said market pricing had predicted interest rates easing next year but a lot of that was driven by international factors – markets expecting the interest rate cycle to have peaked and “wanting to be the first” to pick a decline.

He said the central bank had been consistent in its view that the OCR would remain at least at the current level through 2024.

The Monetary Policy Committee noted that some of the effect of tightening that had already happened was yet to be felt. The average mortgage rate paid by existing borrowers was still expected to increase by one percentage point over the next 12 months as people refixed on to higher rates.

The bank has revised up its forecast for house prices, now predicting a sharper increase than it had in August.

BNZ chief economist Mike Jones said the statement was a “shot across the bows”.

“We had been expecting a bit of pushback on market pricing which had been starting to look at reasonable OCR cuts for next year but didn’t expect the extent of hawkish chatter we saw from the Reserve Bank. It certainly came out swinging.”

He said the bank’s projections pushed out cuts to the point where they could “be put to the back of your mind”.

“We thought some of the better news on the likes of inflation and the labour market was downplayed a little bit. It seems the Reserve Bank might have been spooked a bit by population growth and what that might mean for rents, house prices and aggregate demand.”

Brad Olsen, chief executive of Infometrics, said that reflected the fact there was a clear upward trend in house price data.

“It’s not rapid growth but it’s more rapid than expected. That plays into the question around interest rate increases in future – in my mind if you were to see house price expectations increase at a faster rate … the Reserve Bank could and should be concerned about the level of consumption in the economy. If households are affording houses at higher and higher levels, there has to be a question of how much restriction monetary policy is having on the general economy.”