When doves cry

The highlight of the coming week will be the RBNZ’s April interest rate review. We expect that the RBNZ will keep the OCR at the current record low of 2.25%, but that the accompanying policy statement will strengthen the easing bias the RBNZ espoused in March. However, the RBNZ is facing an increasingly nuanced balancing act. The housing market has picked up and inflation is showing signs of bottoming out. But at the same time, the NZD continues to defy gravity and mortgage rates have not fallen as far as expected following March’s OCR cut. Complicating matters is that simmering away in the background are worrying signs for financial stability.

In March, the RBNZ cut the OCR and indicated that “further policy easing may be required.” We had expected that we would see one more OCR reduction, probably in June. But there has always been some question around the timing of that cut.

Developments over the past few weeks have generally been inflation positive. In particular, while inflation remains low at an annual rate of 0.4%, the details of the March outturn were a little stronger than the RBNZ anticipated. There has been some pick up in the non-tradable components of inflation, and core inflation measures have been stable or a little higher than last year. Barring further significant volatility in oil prices, it appears increasingly likely that inflation has bottomed out.

On top of this, as we’ve previously discussed, housing market data for March were very strong. The REINZ house sales data showed that the Auckland market has exploded back into life, with prices almost back to the levels seen prior to last year’s changes in lending restrictions. Prices in the rest of the country have also continued to march higher.

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