Second chances

Recent data give us no reason to expect the RBNZ to depart from the plans it set out in June. Those plans include a follow-up hike in July, but also suggest a subsequent period of ‘taking stock’. In our view, that raises the risk of a renewed bout of market scepticism about the RBNZ’s longer-term OCR forecasts – meaning that the recent opportunity for borrowers to lock in favourable rates may not be the last.

The clear message from the RBNZ’s June Monetary Policy Statement was that the RBNZ had its eye on a further OCR hike in July, and that it would require significantly weaker data to persuade it otherwise.

Any residual doubts on that score have been largely dispelled: markets are now pricing a roughly 85% chance of a July hike, and we would choose similar odds. As we discussed last week, the March quarter GDP figures confirmed that the New Zealand economy has been growing at an above-trend pace. Consumer confidence has stayed remarkably resilient in the face of lower dairy prices and higher interest rates, while dairy prices themselves bounced modestly in the latest Fonterra auction. And net migration is as strong as ever. While monthly net departures to Australia may have finally found a floor – consistent with an Australian labour market that is no longer getting worse – they remain at historically extremely low levels. Unless the trend turns quickly, annual net migration is easily on track to exceed 40,000 by the end of the year, and to continue running ahead of the RBNZ’s forecasts.

Of course, the main reason why the Reserve Bank cares about net immigration is because of what it means for the New Zealand housing market, and here the data have been less supportive. We have long felt that the Reserve Bank has overemphasised the role of net immigration (rather than financial conditions) in driving New Zealand house price cycles, and the recent housing data would seem to bear this out. Housing demand remains significantly weaker than last year, with sales down a further 1.1% in May and the stock of unsold homes now up 5% since the start of the year.