Softly softly

All eyes were firmly on the RBNZ’s OCR review last week. In the lead up, markets had upped the odds of both an April rate cut and an OCR below 2%, as the NZ dollar rose above 70c against the US dollar and, more recently, weak Australian CPI data introduced the risk of rate cuts across the Tasman.

In the end, the RBNZ left the OCR unchanged at 2.25%, as we had expected. And they retained their easing bias, saying “ further policy easing may be required”. However, contrary to our expectations, they were no more emphatic about the need to cut rates than they were back in the March MPS. That came as a surprise to the market which reacted by sending the NZ dollar and interest rates significantly higher.

The lack of stern language on the exchange rate was a little surprising given that the NZ dollar was around 3% higher than the RBNZ’s projections. Meanwhile commentary on the incomplete pass-through from the last OCR cut to mortgage rates was conspicuously absent. Instead, the RBNZ’s focus was on the modestly inflation positive developments on the domestic front. Strong inward migration, construction activity and the tourism sector all got a nod.

House prices rated a mention too. The RBNZ sounded like it was treating the recent pickup in house price inflation in Auckland with some caution (although recent developments would probably give them more confidence in their bullish March forecasts). It also noted further pressures building in house prices in other parts of the country. Clearly, the RBNZ remains stuck between a rock and a hard place when it comes to the housing market. On one hand, it is relying on interest rate cuts to work through usual transmission channels, boosting asset prices (including house prices) and supporting consumer spending. But on the other hand, it continues to have financial stability concerns about the rapid acceleration in house prices.

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