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Orr's OCR surprise- why cuts might not start until mid-2025

Liam Dann,
Publish Date
Wed, 29 Nov 2023, 1:49pm
 Photo / Mark Mitchell, Herald montage
Photo / Mark Mitchell, Herald montage

Orr's OCR surprise- why cuts might not start until mid-2025

Liam Dann,
Publish Date
Wed, 29 Nov 2023, 1:49pm

The Reserve Bank has today left the official cash rate unchanged at 5.5 per cent.

The RBNZ warned that inflation remained too high and monetary policy would remain restrictive.

The central bank’s forecast interest rate track suggested no rate cuts were on the horizon until mid-2025.

That puts the central bank at odds with market expectations which had started to price in cuts from May 2024.

The RBNZ’s forecasts effectively keep open the possibility of one more rate hike in this cycle.

The kiwi dollar gained about half a US cent on the news that rates could be higher for longer.

Westpac market strategist Imre Speizer said the message from the Reserve Bank was hawkish, and that the currency and interest rate markets had responded accordingly.

“There was clearly a decent hawkish surprise – no question,” Speizer said. ”The OCR forecast is higher and the market now says there is a 75 per cent chance of a rate hike next year.”

Speizer said the market was reacting to the comment that inflation was still too high and that if it doesn’t come off, the bank will have to hike again.

”This reads a lot more hawkishly than anybody would have expected,” he said. “It is right that the kiwi dollar and interest rates go up.”

The two-year swap rate rose by 13 basis points while the 10-year swap gained six basis points.

The Monetary Policy Committee said it was confident that the current level of the OCR was restricting demand. “However, ongoing excess demand and inflationary pressures are of concern, given the elevated level of core inflation.”

If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further, it said.

The Monetary Policy Committee agreed that interest rates would “need to remain at a restrictive level for a sustained period of time, so that consumer price inflation returns to target and to support maximum sustainable employment”.

Inflation came in at 5.6 per cent for the 12 months to September and was up 1.8 per cent for the quarter, according to Stats NZ.

The Reserve Bank’s new forecasts see inflation falling back into the one to three per cent target band by September 2024, but not reaching the mid-point (two per cent) until September 2025.

Committee members noted that net immigration had been higher than previously assumed. This had increased the supply of workers into a tight labour market. However, the demand side effects were now becoming apparent.

Strong population growth had contributed to an increase in housing rents. Rent increases, and any increases in construction costs in response to greater housing requirements, affect inflation directly, as rental prices and construction costs are accounted for in the consumer price index, the Committee said.

House prices had stabilised after earlier declines, with strong population growth and increased nominal disposable incomes offsetting the effect of higher debt servicing costs. House price increases affect inflationary pressures indirectly, via higher household wealth and an associated increase in consumption, the Committee said.


The Reserve Bank makes its last interest rate call for the year today at 2pm.

While economists expect the official cash rate will remain on hold, all eyes will be on the RBNZ’s new forecasts, which should give an indication of where interest rates - and mortgage rates - are headed in 2024.

The full monetary policy statement will include new forecasts for inflation and unemployment, as well as a rate track indicating how soon we can expect the first interest rate cuts next year.

After a series of positive signs of inflation easing across the past few weeks, markets look even more optimistic, picking a rate cut as early as May and as many as three cuts through 2024.

But don’t expect RBNZ governor Adrian Orr to soften his tone on the inflation fight.

Any public admission from Orr or the Monetary Policy Committee that they are feeling optimistic about the inflation fight would only fuel market enthusiasm for cuts, effectively weakening the impact of current settings and making the job harder.

Meanwhile, there remains an outside chance the OCR will still need to be lifted one more time - Westpac economists are picking a hike to 5.75 per cent in February.

“The question is, how much lower is it prepared to push that track?” said BNZ head of research Stephen Toplis.

“That is a quantum leap from the RBNZ’s previous forecasts of no cut until the first quarter of 2025.

“Our suspicion is the bank would be most comfortable with a market somewhere between where it is currently priced and what it forecast in August.”

ANZ’s Sharon Zollner said: “The RBNZ faces a comms challenge, given the market is itching to price cuts more aggressively. We therefore expect a firm tone to the policy assessment.”

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