Tiny hints of easier monetary policy down the track?

Today’s decision by the Reserve Bank of New Zealand (RBNZ) to leave the official cash rate (OCR) unchanged at 5.5% was fully expected, because, after all, inflation itself remains above the 1-3% target, with domestic price pressures such as council rates and general insurance still problematic. However, their (short) written statement that accompanied the decision arguably had a softer tone, with perhaps the first hints of OCR cuts down the line.

The key phrase seems to be the last paragraph of their statement: “The Committee agreed that monetary policy will need to remain restrictive. The extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures.” In other words, although they envisage the OCR remaining above ‘normal’ for a while yet, it can still fall, so long as inflation moves downwards in line with their expectations.

The focus will now quickly shift to the next, full Monetary Policy Statement on 14th August. That decision will be accompanied by detailed forecasts, including projections for inflation and the OCR itself. Given the continued weakness of the economy in recent months, there is a chance August’s statement could be the one where the RBNZ more markedly softens their tone, and perhaps starts to lay the groundwork for an OCR cut as early as November.

Of course, we can’t forget that inflation is back to being the sole target of monetary policy, and the RBNZ will be hugely wary of cutting too early. But February (which is a broad consensus at present for the first rate cut) is still seven months away, that’s a long time for already-struggling firms and households to be stuck with interest rates where they are.

Today’s decision doesn’t really mean too much for housing, and market conditions look set to stay in favour of buyers for a reasonable period of time, or at least those that can afford and secure the finance. Indeed, the shortening of the Brightline Test could simply add to the already high level of available property listings on the market, given that some cash-strapped investors are likely to sell a bit earlier than they originally anticipated.

However, there could now just be some light emerging at the end of the mortgage rate tunnel, and although they might not necessarily fall straightaway or particularly quickly, any drops would no doubt be welcomed by borrowers. To be fair, there’s already been a drift lower for rates in the past few months, but OCR cuts would clearly add some impetus.