Chief Property Economist Kelvin Davidson unpacks the August cash rate decision and Monetary Policy Statement.
Today’s decision by the Reserve Bank of New Zealand (RBNZ) to cut the official cash rate (OCR) by 0.25% to 5.25% probably wasn’t an earth-shattering surprise, although we had been in the ‘hold’ camp, feeling that the RBNZ wouldn’t want to push through that first cut until inflation was officially back within the 1-3% target band. In the event, however, they deemed the economy to be weak enough and inflation ‘close enough’ (to target) to cut now.
Given this was a full Monetary Policy Statement, we also got the RBNZ’s detailed forecasts for a wide range of economic variables – which now all look weaker than before. Indeed, the RBNZ expects the recession to last a bit longer yet, employment to fall, and the unemployment rate to peak at just short of 5.5% in the middle of next year (compared to previous forecast of around 5%). House prices aren’t really expected to show much growth for another year or so, albeit any further near-term falls could also be small.
Meanwhile, inflation is expected to be back within target in Q3 (2.3%), and stay there over the medium term. The biggest change, therefore, came to the projection for the OCR itself, which is now set to fall by perhaps 1.25% over the next year or so. On the previous projection, the rate wasn’t even envisaged to start falling at all until perhaps mid-2025.
So what about the property market? In reality, not a lot has probably changed as a result of today’s decision and revised economic forecasts. Most people had already been anticipating an easing in monetary policy at some stage soon, and this has now just been confirmed. Indeed, banks have already been lowering mortgage rates for some fixed terms, and this process looks set to continue – which will be a huge relief for many households.
On the flipside, job security has dropped, and although the unemployment rate isn’t expected to spike higher, the generally softer labour market environment is still likely to be a restraining influence on house sales and prices. Debt to income ratio caps will have a similar effect as mortgage rates drop over the medium term.
Overall, the next phase of monetary policy easing is here, and mortgage rates will drop over the medium term. But the RBNZ was keen to point out that it all still hinges on inflation ‘playing nicely’ (especially non-tradable/domestic price pressures), so that’s obviously a key factor to keep watching closely.
Meet Kelvin Davidson
Chief Economist
Kelvin joined CoreLogic in March 2018 as Senior Research Analyst, before moving into his current role of Chief Economist. He brings with him a wealth of experience, having spent 15 years working largely in private sector economic consultancies in both New Zealand and the UK.
Full profile