But based on current commercial bank rates, it would not reach a likely peak at 6 per cent until early next year.
Economists noted the resolve of the RBNZ to hold rates at this level for long enough to ensure maximum mortgage pain was transmitted to homeowners.
“We don’t expect OCR cuts until May next year, give or take,” said ASB chief economist Nick Tuffley.
If the Reserve Bank was aiming to land right down the middle then it succeeded, with some economists, including BNZ’s Stephen Toplis, highlighting a “mildly dovish” tone, and others, like Sydney-based Capital Economics, saying it struck some “hawkish notes”.
In the jargon of central banking, a hawk is more worried about inflation and leans towards rate hikes; a dove is more relaxed about inflation, more concerned about economic growth and leans towards rate cuts.
The market reaction leaned towards the dovish - just.
The New Zealand dollar was largely unchanged at around US62.2c after the release.
In the wholesale market, the two-year swap rate - which has an influence on home mortgage rates – was down by about seven basis points at 5.50 per cent.
BNZ’s Craig Ebert noted that markets had last week started to price in an outside chance of another rate hike later in the year.
“Today’s announcement has rubbed out some of that risk - that potential for them to throw in a curveball in the hawkish direction,” he said.
The odds now of another rate increase by November have reduced to 50:50, he said.
ANZ chief economist Sharon Zollner was sticking with a forecast for one more hike in November. But “for now, inflation indicators continue to fall obediently, and the RBNZ’s pause is highly credible”, she said.
The Reserve Bank Committee noted global economic growth remained weak and inflation pressures were easing.
In New Zealand, inflation was expected to continue to decline from its peak but wasn’t expected to be back in the target zone of 1-3 per cent until the second half of 2024.
Inflation in the year to March was 6.7 per cent.
“Core inflation was expected to decline as capacity constraints eased,” the RBNZ said.
“While employment was above its maximum sustainable level, there were signs of labour market pressures dissipating and vacancies declining.”
The committee also noted consumer spending growth had eased and residential construction activity had declined.
“More generally, businesses were reporting slower demand for their goods and services and weak investment intentions,” it said.
In other words, there were clear signs that an economic downturn is under way and unemployment is expected to rise.
After recent falls, house prices were now around sustainable levels, the RBNZ said.
“House prices have stabilised in recent months, and the committee noted that the outlook for the housing market has become more balanced. Higher net migration is supporting demand for housing, but higher interest rates continue to exert downward pressure on housing demand.”
There appeared to be “some upgrade” in the RBNZ’s view on house prices, which are now seen as “more balanced” compared to their previous forecasts for further falls in prices, said Westpac chief economist Kelly Eckhold.
“On the other hand, the RBNZ acknowledges the growth outlook in China has weakened and that March quarter GDP was a bit weaker than forecast. It seems that the net of these factors has left their view unchanged, and hence the stance of policy is seen as appropriate.”
- Additional reporting Jamie Gray.
Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist, as well as presenting and producing videos and podcasts. He joined the Herald in 2003.
