The Official Cash Rate to Remain Unchanged

10 May 2018

The Official Cash Rate was held at 1.75% today. This statement suggests that interest rates will remain unchanged until late 2019 at the earliest.

The Official Cash Rate (OCR) will remain at 1.75 percent for some time to come. The direction of our next move is equally balanced, up or down. Only time and events will tell. Economic growth and employment in New Zealand remain robust, near their sustainable levels … the emerging capacity constraints are projected to see New Zealand’s consumer price inflation gradually rise to our 2 percent annual target. To best ensure this outcome, we expect to keep the OCR at this expansionary level for a considerable period of time. This is the best contribution we can make, at this moment, to maximising sustainable employment and maintaining low and stable inflation”.

CoreLogic NZ’s Senior Research Analyst Kelvin Davidson comments:

If interest rates changed today, it would have been a shock for many. Inflation remains low and looks unlikely to test the top of the target 1-3% policy band for the foreseeable future. Given low unemployment, the new labour market component of the Policy Targets Agreement (i.e. maximum sustainable employment) is not putting on any pressure to shift rates either.

While the housing market may have slipped down the Reserve Bank’s list of key considerations, sales volumes are low and our ‘back of the envelope’ forecast suggests that turnover will tick along at 80,000-85,000 p.a. in both 2018 and 2019. Meanwhile, property value growth remains subdued in the previously rampant Auckland market, and the national average increase of 7.6% in the year to April is probably within the comfort zone for policymakers.The loan-to-value ratio (LVR) speed limits, in conjunction with higher serviceability tests from the banks, have also done their job in terms of dampening investor activity. Meanwhile first home buyers (FHBs) have enjoyed a less crowded market and to keep a foothold in the market. At 22%, our proprietary measure shows that FHBs currently account for a higher proportion of property purchases than at any point in the last decade. The RBNZ may change the LVR rules again in the coming months, but this will be tinkering rather than wholesale changes.

For now, any concerns that higher offshore financing rates may start to feed through to increased domestic mortgage rates seem to have receded, which is also one less headache for the RBNZ in formulating monetary policy. Even so, this remains as a possible risk and is something we’re watching closely. After all, about 90% of existing mortgages in NZ are either floating or will see the fixed-term come to an end over the next two years. Higher interest rates would be unwelcome for those fixed-term borrowers when their mortgage review rolls around.

Overall, nothing in today’s statement suggests an expectation to alter the cash rate and it will likely remain on hold until at least next year. Thereafter, any increases will likely be slow and small. This should allow the property market’s controlled slowdown to run on.

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