The New Zealand Reserve Bank has shocked economic and property experts this week, raising the cash rate 0.25 per cent while indicating the next interest rate move will likely be down.
The central bank increased rates to 5.5 per cent on Wednesday, which was largely in line with expectations, but the cash rate projection surprised many, with the peak forecast remaining at 5.5 per cent.
Many experts had expected the RBNZ to increase the rate terminal point to 5.75 per cent.
”It’s crazy, as you would expect,” Westpac senior market strategist Imre Speizer told the New Zealand Herald.
”It’s a very dovish surprise in the OCR track. The 25 basis point hike was not a surprise – that was fine.
”It was the retention of the 5.5 per cent forecast peak.”
”In other words, they are signalling that they have completed the cycle. It’s over. And that was a major surprise for the market as most had expected more rate hikes to come.”
Previously there had been speculation that the cash rate could rise as high as 6 per cent.
The RBNZ cited inflation easing from its peak, a slowdown in consumer spending growth and a drop in residential construction activity among the factors it considered in making its decision.
House prices had also returned to more sustainable levels, the bank said.
“More generally, businesses are reporting slower demand for their goods and services and weak investment intentions,” the RBNZ said.
Businesses report that a lack of demand, rather than labour shortages, is now the main constraint on activity.”
Still, CoreLogic NZ Chief Property Economist Kelvin Davidson described the RBNZ move as “intriguing”.
“The most intriguing projection however was the OCR track itself, which, following almost every other economist shifting the forecast peak up, was expected to be at least 5.75 per cent,” he said.
“The RBNZ outlook stayed the course though, with the forecast peak remaining 5.5 per cent, with cuts now expected to be brought forward.
“Beginning in the third quarter of 2024, the RBNZ forecasts the OCR to drop below 5 per cent by the middle of 2025 and below 4 per cent at the start of 2026.”
Mr Davidson said he’d be surprised if the bank’s decision changed mortgage rates in the short-term.
“Indeed, with no change to the forecast peak, market pricing may actually come back a little after recent data and commentary had started to push things in the other direction – the RBNZ may have quashed those expectations,” he said.
“In terms of what this means for the housing market, on balance, it could be pretty neutral.
“Mortgage rates are still high and unlikely to shift lower in a hurry so the current expectation of having a little bit further to go in this downturn remains.
“Additionally the extra strain on those existing borrowers who are yet to see their fixed loans reprice onto current interest rates is still to come.
“That could be especially concerning for the minority of borrowers who may actually move onto a new interest rate higher than their original test rate.”
Mr Davidson said the downturn was close to ending but, with affordability still stretched and caps on debt-to-income ratios for mortgages looming next year, there was unlikely to be a fast rebound.
