Squirrel: RBNZ indicates we’re at peak OCR

Squirrel’s John Bolton explains why recent changes to the OCR aren’t necessarily a bad thing and what it means for the future…

Kiwis have been divided on possible OCR changes

Anyone who’s listened to Squirrel’s new podcast would know that opinions across the Squirrel team were pretty sharply divided in terms of how the Reserve Bank (RBNZ) would play things with its most recent Official Cash Rate (OCR) announcement.

Me? I was firmly of the view that we’d end up with a 0.25% increase that would take us up to the RBNZ’s forecasted peak OCR of 5.50%.

The thinking behind this was that it just made sense for the RBNZ to go that final step and see through the course they’d laid out for us.

But with signs good that New Zealand is starting to get on top of the inflation battle, I was sure that would be it.

How has the OCR changed?

The RBNZ has opted to play it down the middle, pushing through a 0.25% increase to take us from 5.25%, up to its peak forecasted OCR of 5.50%.

As part of his commentary, Governor Orr also indicated that we can expect the OCR to stick at that level for the next 12 months, through until the middle of next year – clearly indicating that we’ve hit peak rates for this interest rate cycle (something I’ve been saying for a while now).

Why is this good news?

It’s a good outcome, comparatively speaking.

I say that in light of the fact that so many bank economists had predicted we were in for another 0.50% increase, and a revised forecast that would see the OCR get as high as 6%.

Their argument was that our recent uptick in immigration numbers, coupled with the government’s so-called “expansionary” Budget, would undermine the progress that had been made against inflation, and demand a harsher approach on the OCR front.

I’d been firmly of the view that going any harder would be an overcorrection, that failed to take into account mounting evidence that inflation is starting to cool, and of just how stretched mortgage borrowers are already (with plenty more still to come).

It would’ve been disappointing, but it’s also pretty standard practice for Reserve Banks. They have a tendency to over-adjust at both the top and bottom of the cycle.

My sense was also that immigration will ultimately have a deflationary impact – with the influx of people bringing much-needed labour into the market and helping to eliminate the wage price pressure which had been such a big driving factor of inflation.

Going any harder would have been extremely tough to justify. And thankfully the RBNZ has shared that view.

What does this mean for mortgage rates?

As a result of the bank’s recent announcement – and particularly the RBNZ’s indication that we’re now at peak OCR – I’d expect that we’re going to enter a nice, stable period in respect of mortgage interest rates.

It doesn’t mean that the next 12 months aren’t going to be tough for Kiwi mortgage borrowers, as more and more people roll off low fixed rates onto current levels.

But, all things being equal, the next moves from here will be downwards, and hopefully that knowledge will bring some small relief.