OCR still on hold; hopes inflation will return to target

Economists predicting the first interest rate cut in November

Reading the tea leaves on one of the shortest and least revealing statements in many years, economists warn that the Reserve Bank has maintained a hawkish tone in its latest Monetary Policy Review.

The bank left the Official Cash Rate (OCR) on hold at 5.5 per cent. It was the sixth time in a row the rate has been left unchanged. The last move, a hike, was in May last year.

“While some near-term price pressures remain, the committee is confident that maintaining the OCR at a restrictive level for a sustained period will return consumer price inflation to within the 1 to 3 per cent target range this calendar year,” the Reserve Bank (RBNZ) said.

Most economists are now saying we’ll see the first interest rate cut in November. However, markets are more enthusiastic, with pricing for overnight indexed swaps suggesting the first cut is likely in August.

“We think the RBNZ’s communication is still more hawkish compared to near-term market pricing,” said UBS economist Nic Guesnon.

In cumulative terms, the market is still pricing 20 basis points of easing by August 24 and 55 basis points by November (the final meeting of 2024), Guesnon said. In other words, market traders are now betting on two cuts this year.

“The New Zealand economy continues to evolve as anticipated by the monetary policy committee,” the RBNZ said in its statement.

“A restrictive monetary policy stance remains necessary to further reduce capacity pressures and inflation.

“Globally, while there are differences across regions, economic growth remains below trend and is expected to remain subdued. However, most major central banks are cautious about easing monetary policy given the ongoing risk of persistent inflation.

“Economic growth in New Zealand remains weak,” it added, rounding out the four-paragraph statement.

Kiwibank chief economist Jarrod Kerr described it as “the shortest statement we’ve ever seen’’.

“So why so short? Well, the RBNZ prefers to make big changes, if able, in its detailed Monetary Policy Statements [MPS],” Kerr said.

“The RBNZ was never going to

The RBNZ was never going to adjust policy today. And the likelihood of a change in May is very slim (to none). Kiwibank chief economist Jarrod Kerr

adjust policy today. And the likelihood of a change in May is very slim (to none). Some in the market are calling for cuts to commence in August. That’s premature in our view. Although we’d love to see it.”

Despite the market pricing, Kiwibank doesn’t expect a cut as early as August.

“We think they need to see inflation below 3 per cent before they will contemplate cuts. And the earliest that will happen is October, when the [third quarter] inflation report is published. So that means the first reasonable chance of a rate cut is November.”

ASB senior economist Mark Smith took a similar line and warned that the timing of the first cut wouldn’t mean a return to much lower rates. “We don’t envisage OCR cuts being delivered until the RBNZ is confident that sub 3 per cent inflation will be delivered and maintained.

“The earliest date that we could conceivably expect the start of OCR cuts would be the November MPS, and it seems more likely than not that monetary settings will remain on the restrictive side of neutral for a year or so beyond that.”

Westpac economists remain even more hawkish, unconvinced we’ll see a cut until February next year.

“While inflation is likely to be within the target range by the end of the year, pricing intentions and inflation expectations indicators remain elevated and are only slowly falling,” said Westpac chief economist Kelly Eckhold.

“We continue to see the OCR as remaining on hold through 2024 with a gradual reduction in the OCR coming from the February Statement.”

Key data to watch between now and the May Statement included: March quarter consumer price index (CPI) inflation — due next Wednesday and March quarter labour market data (due on May 1), Eckhold said.

With CPI data next week, the level of core inflation would be key. The RBNZ forecasts that will land at 0.4 per cent for the quarter, and Westpac has pencilled in 0.8 per cent.

Market reaction to yesterday’s review was minimal, with the New Zealand dollar firming a touch to US60.65c from US60.56c before the release. Wholesale interest rates were mostly unchanged on the back of the announcement, which was similar to the previous RBNZ statement issued in February.