RBNZ Pause – Time to Sell NZD!?

5.5% Official Cash Rate

On 12 July 2023, the Monetary Policy Committee today agreed to leave the Official Cash Rate (OCR) at 5.50%.

Next Update: 16 August 2023

The Monetary Policy Committee (MPC) made the decision to keep the Official Cash Rate (OCR) unchanged at 5.5%, a move that was widely anticipated. This marks the first time in almost two years, since the Reserve Bank of New Zealand (RBNZ) began its hiking cycle, that the OCR has remained unchanged. The outcome was in line with the expectations of Citi and consensus, and market pricing also indicated a strong preference for a pause in rate hikes. The MPC's decision aligns with the final paragraph of the May Monetary Policy Statement (MPS), which stated that interest rates would need to remain at a restrictive level for the foreseeable future to achieve the target range of 1 to 3% for consumer price inflation while supporting maximum sustainable employment.

If you don’t have idea on what is the “OCR from RBNZ” please watch this video on ACY Securities YouTube channel where I explain! Click here

The Statement issued by the MPC was neutral and consistent with the previous guidance. The July Monetary Policy Review (MPR) Statement did not offer any new guidance, as the MPC had already indicated in the last MPS that it would maintain rates at their current level for an extended period. The OCR track from the previous meeting remained unchanged at 5.5% until the end of 2024, and yesterday's Statement is consistent with that track. Additionally, economic data since the May MPS has been lower than expected, with the economy contracting for the second consecutive quarter in Q1, contrary to the RBNZ's projections of growth. The Statement further acknowledged that despite ongoing repair and rebuild work, growth is likely to remain weak due to the impact of severe weather events.

Labour demand is showing signs of easing, while financial stability risks remain low. The significant influx of net overseas migration has helped alleviate extreme labour shortages across various sectors. However, this influx has also contributed to increased demand, particularly in the housing market. The MPC's view is that the current tight stance on monetary policy is offsetting the effects of net overseas migration, resulting in a continued decline in housing demand, albeit with recent signs of stabilization. Overall, house prices are still falling, but the MPC believes they have reached a more sustainable level in line with its mandate. Additionally, the Statement highlighted that while debt levels are high, early indicators suggest only a moderate increase in stressed lending in the coming months, and non-performing loans remain at very low levels.

The MPC seems willing to allow the lagged effects of monetary policy to unfold before making any adjustments to its current guidance. For instance, the Statement mentioned that average mortgage rates are expected to rise to around 6% in early 2024, compared to 3% in 2022. This is expected to significantly slow down consumption and help bring inflation back within the target range next year. Although the risks to growth outcomes are skewed to the downside, it is unlikely that the MPC will change its guidance to bring forward the timing of the first rate cut, which is currently projected for late 2024. Doing so would loosen financial conditions unnecessarily at a time when inflation is above target and when employment remains above its maximum sustainable level.

The first-rate cut is likely to occur in early 2024. The RBNZ was the first central bank to initiate the tightening cycle, which is believed to have now reached its peak. The bar for further rate hikes remains extremely high. While the MPC will continue to emphasize a tight stance on monetary policy for the foreseeable future, we anticipate that the output gap will close at a faster pace due to sluggish household consumption growth. As a result, I maintain my expectation that the first rate cut from the RBNZ will take place at the beginning of 2024, rather than the end of 2024.

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