Introduction to the Official Cash Rate (OCR) Review
The Reserve Bank of New Zealand (RBNZ) is set to review the Official Cash Rate (OCR) in the coming week, and the decision is expected to be a "hold" at 3.25%. This would end a sequence of six consecutive cuts, starting in August last year when the rate was at its cycle high of 5.5%. However, the decision is not a sure thing, and the RBNZ’s Monetary Policy Committee (MPC) has a tough choice to make.
Economic Indicators are Moving in Conflicting Directions
The economy is sending mixed signals, making it difficult for the RBNZ to make a decision. On one hand, the March quarter GDP figure was a 0.8% rise, which is double the growth the RBNZ forecast in its May Monetary Policy Statement (MPS). This could suggest that the RBNZ should put the cutting scissors away and leave the OCR on hold. On the other hand, more recent data, such as the Performance of Services Index and Performance of Manufacturing Index, has tanked badly, suggesting a potential return to recession.
High Frequency Data Suggests a Slowdown
Other high frequency data, such as electronic cards transaction data and monthly filled jobs data, also suggests a slowdown in the economy. House prices are still subdued, and migration levels are now subdued as well, which will not be supportive of extra economic activity. However, the primary sector is performing strongly, which is good news for the economy.
Inflation is a Concern
Inflation is also a concern, with food prices having lifted 4.4% in the 12 months to May. This could lead to the dreaded "inflation expectations" and potentially inflationary pricing behavior. The RBNZ would be very wary of such behavior re-emerging, given that it’s only recently dampened the inflationary expectation fires down.
The RBNZ’s Decision
The RBNZ’s decision on Wednesday will not be accompanied by an MPS, so it will just be a pithy news release accompanied by the record of the MPC meeting. The RBNZ doesn’t generally like to substantially change tack at non-MPS OCR reviews, but it will do if it has to. Current financial market pricing sees a less than 20% chance that the OCR will be cut in the coming week, but the probability of an August cut is more than 70%.
What it Means for Mortgage Rates
If the RBNZ does decide to hold the OCR at 3.25%, mortgage rates aren’t likely to be reduced much more in the short term – not without further OCR cuts. This might be a bit of a blow for the not inconsiderable numbers of people who appear to be waiting on short fixed terms or floating rates for further cuts.
Conclusion
In conclusion, the RBNZ’s decision on the OCR review is finely balanced, and the committee has a tough choice to make. The economy is sending mixed signals, and inflation is a concern. The RBNZ will need to weigh up all the factors and make a decision that maintains price stability over the medium term. Whatever the decision, it’s likely to be a wait-and-see approach, with the RBNZ keeping its options open for future adjustments. The key question is whether the apparent stall in the economy in the second quarter continues or worsens in the third quarter, and whether this will require further OCR cuts. Only time will tell.
