Short description: The RBNZ left the OCR at 5.5% as expected but was more hawkish on future prospects. The RBNZ’s projections continue to reflect the risk of further increases in the OCR in 2024. An easing cycle looks quite some time off.
- The RBNZ’s projections for the OCR were revised 10bp higher to a peak of 5.69% in September 2024, implying around a 75% chance of a further 25bp rate hike. The projections imply a gradual easing of policy from the first half of 2025. The long-run neutral OCR was adjusted up 25bp to 2.5%.
- The RBNZ’s short term CPI forecasts have been revised down slightly in the near term but significantly higher from mid-2024 reflecting a concern that migration driven population growth will add to demand and the housing market. CPI inflation still gets back inside the range in Q3 2024, but the RBNZ sees upside risks here.
- Our overall impression is that this is in line with our concern that more tightening may be required to ensure inflation returns promptly to target.
Talking tough and maybe doing something.
As widely expected, the RBNZ left the OCR at 5.5% at its final policy review for this year. Of much greater interest to markets was what the Bank had to say about the outlook for the OCR next year and beyond.
In summary, the updated projections in the accompanying Monetary Policy Statement (MPS) contained significant revisions from those published back in August. The projections continue to reflect a risk that a higher OCR will ultimately be required, with the probability of a further 25bp hike in 2024 now estimated at around 75% compared with 36% previously (the peak OCR increased to 5.69% from 5.59% previously). Thereafter, with CPI inflation forecast to move back inside the target range in Q3 next year (unchanged from the August forecast) the RBNZ’s projections imply a modest easing cycle might be possible from mid-2025 – much later than implied by current market pricing.
The most notable changes in the press statement and meeting record from those which accompanied the October policy review was increased concern that inflation would remain persistent and upside risks from these upwardly revised forecasts. A key driver is increased concern that migration and population would drive increased demand and medium-term inflation pressures. The RBNZ’s forecast for house prices was revised up from 4.3% to 5.5% for 2024 reflecting these pressures. The statement of record also notes that government investment looks set to be stronger (in line with PREFU) which also adds to medium term demand concerns.
Our overall first impression is that the RBNZ is concerned that further increases in interest rates may be required towards the middle of 2024. Key will be migration and housing market indicators over the next few months and the next couple of CPI outturns. The new government’s fiscal projections in the HYEFU before Christmas will also be a key focus. OCR cuts certainly do not seem to be on the radar for the RBNZ right now.
We will publish a bulletin with further commentary and analysis later today, including implications for our call on the outlook for the OCR, once we have had time to read the full MPS and observe the Governor’s post-meeting press conference.
