Here's what the Reserve Bank doesn't want you to know about its OCR decision this week

Friday, 31 March 2023

The official cash rate increase has been steep but is expected to taper off soon.

The Reserve Bank’s official cash rate (OCR) hiking cycle is nearing an end, even if the bank doesn’t want you to know that, economists say.

It will review the OCR on April 5 and is expected to increase the rate by 25 basis points, taking it to 5%.

The Reserve Bank expects the OCR to peak at 5.5% this cycle but some economists say it will not need to go that high to bring inflation under control.

But they said the Reserve Bank would be watching its words carefully to make sure it gave the impression it was committed to keeping pressure on to stamp out inflation, even if there were not many more increases coming.

Otherwise, markets could price in even more cuts into longer-term home loan rates, reducing the OCR’s impact.

* Why is a two-year home loan rate cheaper than a one-year rate?

Kiwibank chief economist Jarrod Kerr said wholesale markets were already factoring in rate cuts later this year.

Homes used to cost a lot less, but in previous decades home loan interest rates were much higher. Home loans rates are however on the rise as the Reserve Bank Te Pūtea Matua has been raising the official cash rate to fight inflation.

“I don’t think the Reserve Bank is going to like that at this stage – I don’t think the Fed or other central banks like the fact that rate cuts have been priced in so quickly.

“What markets do is when the central banks stop tightening they immediately look to the next move. So what central banks do is even though they’re coming to an end [of increases] they’ll say ‘we’ll look to keep rates at high levels for a long period of time, into 2024’ – to stop the decline in wholesale rates.”

ASB senior economist Chris Tennent-Brown agreed the Reserve Bank would be careful about its message. “They don’t want markets to price in a lot of cuts and have the long-term rates even lower. They want to keep rates around current levels for a while yet. How they manage the jawboning to achieve that will be really interesting next week.”

Longer-term home loan rates have eased slightly since the last OCR increase, primarily due to weakness on global markets.

Kerr said wholesale rates had already come down on the back of factors such as bank problems in the US and Europe and a realisation that economic data was showing momentum easing and that central banks had probably done enough to get on top of inflation. He said any step beyond 5% for the Reserve Bank would be a step too far.

Tennent-Brown said global influences were eclipsing what the Reserve Bank was doing when it came to the price of longer-term home loan fixes.

For shorter-term fixes, there was a balance for banks between a higher OCR and a quiet housing market, he said.

“It will be interesting to see in the shorter-term rates whether the banks are still happy to effectively leave the fixed rates where they are rather than move them up in the usual lockstep fashion.

“There’s not a lot of new lending going on with the housing market so quiet. There’s going to be some upward pressure on short-term rates but on the same note banks are willing to lend and that’s going to be an offsetting downward pressure to hold the rates where they are. How that all pans out will depend on the whole mix of conditions.”

ANZ senior economist Miles Workman said the central bank made it clear in February that it believes there is more work to do. But he said the Reserve Bank was getting traction in its battle against inflation. “You can see that in the data, the business outlook survey, consents, retail trade.

“What they need to see is loosening in the labour market. That supply versus demand imbalance in the labour market is very inflationary and they will need to keep going until they get that into sustainable territory.”

Tennent-Brown said the Reserve Bank was still clearly focused on wanting to get on top of inflation but there did not look to be as much urgency to keep up the pace. “The fact is we’re getting towards the end of the cycle so the steps do get a bit smaller now as the Reserve Bank fine-tunes the end point.”