“It was a big moment for the market yesterday after the ANZ introduced the idea that the Reserve Bank would not be done, and would continue the tightening cycle,” Hamish Pepper, fixed income and currency strategist at Harbour Asset Management, said.
“It’s unequivocal in my mind that they do not have any interest in doing that,” he said.
“It’s now much more of a matter of how much longer the official cash rate stays at 5.5 per cent before it can be lowered,” he said.
ANZ’s controversial rate call came after a speech delivered in late January by Reserve Bank chief economist Paul Conway, which was perceived in the market as being more “hawkish” in the fight against inflation.
Pepper, a former Reserve Bank analyst, said it appeared Conway had discounted signals from the most recent batch of GDP data, which showed the economy contracted in the September quarter.
“I think we now know where the Reserve Bank is in terms of their thinking,” he said.
“It aligns more with our view of the economy – that monetary policy is working, the economy is quite weak, will continue to weaken, and that that will translate to the labour market loosening quite a bit further in terms of the unemployment rate,” he said.
Market pricing suggests the Reserve Bank will start easing in the second half of this year.
Mortgage rates have already started to decline, but there would still be the lagged effect of people rolling off their fixed-term mortgages onto new terms at higher rates, Pepper said.
“But there is more certainty now that the direction of travel is for much lower interest rates,” Pepper said.
In Wednesday’s statement, the Reserve Bank said it was confident the current level of the official cash rate was restricting demand.
However, it said a sustained decline in capacity pressures in the New Zealand economy was required to ensure that annual inflation returned to the 1 to 3 per cent target.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
