Market Update: OCR Rises Again as RBNZ Continues Anti-Inflation Campaign

OCR RISES AGAIN AS RBNZ CONTINUES ANTI-INFLATION CAMPAIGN

The Reserve Bank of New Zealand has increased the Official Cash Rate again in an attempt to rein in inflation.

The RBNZ stung mortgage holders with another 0.5 percent interest rate increase sending the Official Cash Rate (OCR) to 3.5% on Wednesday.

It’s the eighth consecutive rise since October 2021 when the rate was 0.25 percent, and the fifth increase of 50 basis points in a row. The move brings the rate to the highest level since mid-2015.

The Monetary Policy Committee said in a statement released today that it had discussed increasing the OCR by 75 basis points, with some members saying it would “reduce the likelihood of a higher peak in the OCR being required”.

"Other members emphasised the degree of policy tightening delivered to date. Members also noted

the lags in monetary policy transmission and a slow pass-through to retail interest rates. On balance, the Committee agreed that a 50 basis point increase was appropriate at this meeting,” the RBNZ said in its monetary policy statement released today.

The Committee noted that “inflation is currently too high and employment is beyond its maximum sustainable level”.

“The Committee agreed to continue increasing the Official Cash Rate (OCR) at pace to maintain price stability and support maximum sustainable employment.”

It also discussed the downward pressure on the New Zealand dollar placed by higher global interest rates and increased risk aversion in global markets.

“Members believed that this would contribute toward a rebalancing of New Zealand’s current account over the long-term. However, a lower New Zealand dollar, if sustained, poses further upside risk to inflation over the forecast horizon.”

The Committee says household balance sheets remained “resilient despite recent declines in house prices”.

“Members agreed that falling house prices and declines in other asset prices will negatively impact household consumption. Members noted that

household debt servicing costs were rising and had further to increase on average as more fixed-rate mortgages are reset at higher interest rates. The impact of higher debt servicing requirements are an important channel of monetary policy transmission.”

The announcement comes as house prices experienced a significant fall in the last quarter.

“The quarterly fall of -4.1% from July to the end of September ranks as one of the worst periods for national value falls on record, only marginally better than the three months to the end of August 2008 (-4.4%), in the wake of the Global Financial Crisis,” CoreLogic NZ Head of Research, Nick Goodall says.

“As interest rates have increased, and credit is harder to attain, the housing market is firmly in retreat following an exceptional period of growth. Values increased 41% over a 19-month period when the COVID-19 pandemic closed borders and fiscal and monetary stimulus drove a push to asset ownership,” Goodall added.

CoreLogic reports that values fell a further 1.5% in September, easing slightly from the -1.8% fall in August.

“Despite the rate of decline easing in September, it’s probably too early to suggest the housing market has moved through the worst of the downturn. With the OCR expected to increase a further 50 basis points to 3.5% later today, that downwards

pressure on house prices is likely to continue,” Goodall says.

He says the market share for cash multiple property owners (MPOs) has also risen, up from around 9-10% late last year to 14-15% recently. Meanwhile, ANZ’s latest NZ Focus Property report says prices are expected to continue to fall by 1% a month until the end of this year “before gradually finding a floor over the first half of 2023”.

“We don't see any good reasons why the housing market might suddenly turn a corner over the coming months," the report says.

"Mortgage rates are still lifting, housing scarcity has been greatly eroded, and affordability remains dire (albeit a little better).”

The economists forecast a peak-to-trough decline in prices of about 15%.

“Importantly, if the market does put out any green shoots while the labour market remains too tight and CPI inflation too high, the OCR (and mortgage rates) will very likely need to go higher than otherwise, and for households with a high debt-to-income ratio, that would be particularly bad news.”

The economists reiterated their earlier prediction for a peak OCR of 4.75% by mid-2023.