ANALYSIS

Households and businesses can be cautiously optimistic interest rates appear more likely to fall than rise – for now, at least.

At face value, the Reserve Bank (RBNZ) took a “steady as she goes”
approach when it reviewed monetary policy on Wednesday.

It kept the official cash rate (OCR) at 5.5 per cent, continued to suggest there was a chance the rate could rise, and only pencilled in the first cut for mid-2025.

The projections in the RBNZ’s Monetary Policy Statement largely mirrored those in its November statement, which was deemed very hawkish, as it took a hard-line, “tough on inflation” stance.

What exactly did the RBNZ say?

RBNZ governor Adrian Orr explained while recent economic data has been mixed, overall, the RBNZ is comfortable the economy is tracking in line with expectations.

“The data we have seen has given us more confidence around the outlook that we’ve held for over a year or so now,” Orr said in a press conference on Wednesday afternoon.

The following morning, he told Parliament’s Finance and Expenditure Committee the RBNZ was putting emphasis on the “wait” part of the “watch, worry and wait” approach it adopted while keeping the OCR at 5.5 per cent.

Orr went on to say while some people believe the RBNZ needs to lift the OCR to “be tight”, or impose restrictive monetary conditions, it actually just needs to keep the OCR at a level that’s above neutral.

Why would Orr make this comment?

Traders in financial markets looked beyond the hawkish numbers in the Monetary Policy Statement and interpreted the commentary in the document as signalling a significant shift in stance by the RBNZ.

Why the dovish interpretation?

Infometrics chief executive Brad Olsen noted having previously suggested it was very worried about domestically driven inflation, the RBNZ came out strongly, saying it was “confident that the current level of the OCR is restricting demand”.

Rather than stress it would jump on any sign of inflation not abating, the RBNZ suggested it would continue to wait for high interest rates to keep filtering through the economy. The average interest rate those with fixed mortgages were paying in December was 5.73 per cent.

JB Drax Honore chief strategist Sean Keane noted Orr didn’t use opportunities he had in the press conference to talk tough on inflation.

There were no “cool your jets” remarks, as the governor refrained from urging people to cut their spending.

When the Herald asked Orr if he’d be comfortable if mortgage rates fell on the back of the RBNZ being less hawkish than the market expected, he didn’t say he needed them to remain elevated, as there was more to do to curb inflation.

Rather, he noted banks would use rates to compete for customers, who have little appetite to borrow at the moment.

The market interpreted these comments, among others, as a sign the RBNZ is pivoting.

Consequently, swap rates and the New Zealand dollar fell notably.

Traders in financial markets have been very sensitive, if not jumpy, recently. Late last year, they were convinced interest rates would fall soon.

But when economists at the country’s largest bank, ANZ, came out with a shock forecast for two more OCR hikes this year, markets started pricing in hikes.

Part of the reason swap rates fell so much on Wednesday was because the RBNZ’s statement looked dovish (or softer on inflation) compared to what markets were expecting, rather than particularly dovish in its own right. Indeed, there isn’t anything soft about the RBNZ only pencilling in the first OCR cut for next year.

What does this mean for mortgage rates?

The question then is, will mortgage rates fall with swap rates, or will banks dismiss wholesale markets as being characteristically volatile?

The answer isn’t clear-cut, but from where we currently stand, modest cuts appear more likely than increases.

Both Keane and Olsen believed mortgage rates would fall in the near term.

Olsen – who put less emphasis on the RBNZ’s change of tone than Keane did – believed mortgage rates would only come down a little and rates in the 5 per cent range were still about a year and a half away.

Olsen and Keane also recognised the point Orr made around demand for mortgages being at rock bottom, and this prompting banks to compete for business on price.

Indeed, ASB’s decision to cut its 18-month mortgage rate by 26 basis points just before Wednesday’s OCR review was likely about it trying to gain market share after its lending contracted in the last six months of 2023.

Westpac’s former treasurer Jim Reardon, who now works as a consultant, agreed competition would put downward pressure on mortgage rates.

He believed the RBNZ wouldn’t want its shift in tone to prompt the housing market to take off again. But on the other hand, it would be worried about the state of the economy.

‘’We’re on the edge of something really bad in New Zealand, I think. Any tightening [of monetary policy] would just add fuel to that,” he said.

There’s always a ‘but’…

To complicate matters, ANZ economists continue to hold a different view.

They’re still worried about inflation (annual non-tradeable inflation was 5.9 per cent in the December quarter), and fear the RBNZ’s decision to soften its language risks creating a “one step forward, two steps back” kind of scenario, where banks cut mortgage rates too much too soon, only for the RBNZ to have to hike the OCR again.

ANZ chief economist Sharon Zollner is highly regarded and may well end up being right.

But for now, the market’s response to the RBNZ’s change of tone, coupled with the fact banks are competing for customers with little appetite to borrow, suggests mortgage rates are likely to fall a bit.

Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.