Private property issue #110 - OCR update

Yesterday, the Reserve Bank left the OCR at 5.5%. No surprises there.

Everyone knew the Reserve Bank wasn’t going to change the interest rate.

The real action was in the forecasts.

• Does the Reserve Bank plan to change the OCR soon?
• What do they think will happen to house prices?
• And when will inflation be back in its box?

Let’s dig into the answers.

Inflation is a tough nut to crack.

The Reserve Bank thinks inflation will be back within the target band by September 2024.

But only just. They think inflation will fall. But not as fast as they did 3 months ago.

Remember that. This part is important.

They also think that homegrown inflation will stay sticky. But, they think imported inflation will fall faster.

This has an impact on when interest rates will start coming down.

Interest rate cuts may have to wait

Sticky inflation is a problem for the Reserve Bank. They want to get it between 1-3% (and really, down to 2%) toot sweet.

Our economy isn’t too flash at the moment. The economy has shrunk in 4 out of the last 5 quarters.

However, they may still need to either increase the OCR (or keep it higher for longer) to make sure inflation comes down.

3 months ago, their forecasts implied a 40% chance of another hike in the OCR. Their new forecast implies a 60% chance.

I don’t think it’ll happen. But the Reserve Bank thinks they may need to keep the OCR higher a bit longer to crunch inflation.

A few weeks ago, people were talking about an OCR cut in August. Yesterday’s release makes that less likely to happen.

Just keep in mind that the Reserve Bank doesn’t always do what it says it’s going to do.

Usually, they stick to their OCR forecast for 6 months. After that, it depends on what’s happening in the economy.

The big house price increases will come in 2025

The Reserve Bank also updated its house price forecasts.

They’re now saying that prices won’t go up so much in 2024. The real rise will come in 2025 and 2026.

They reckon that house prices will go up:

• 2.3% in 2024
• 5.4% in 2025, and
• 5.8% in 2026.

This could all change next week

You do need to know that all this analysis could change next week.

Because in 7 days Nicola Willis (the finance minister) will deliver her first budget.

The Reserve Bank hasn’t seen the budget yet. So their forecasts could be out of date by the next time I send this newsletter.

If Nicola Willis gives us big tax cuts and borrows money to do it – then we all have more money.

That means we’ll all go spend, and inflation will be higher. That means interest rate falls may have to wait.

But if the tax cuts are small and the government cuts are large, then inflation could fall faster. That would bring the interest rate cuts forward.

So make sure you tune in next week to find out what’s in the budget and how it impacts property investors.