What the Reserve Bank said and should you believe it?

Yesterday, the Reserve Bank decided to hold the OCR at 5.5%. Although the main rate didn’t change, the bank signaled that interest rates might come down faster than they previously thought.

So, what does the bank predict will happen to the OCR, interest rates and house prices? And how much faith should you have in their forecasts?

Prediction #1 – The OCR won’t drop until the end of the year

There was less tough talk on inflation than many expected in the Reserve Bank's comments. However, our central bank doesn't plan to drop the OCR until the end of the year or early 2025.

Inflation is still too high at 4.7%. But the Reserve Bank acknowledged that high interest rates are doing their job. That’s why there is a lower chance that the OCR will increase again.

Back in November, the bank’s forecasts implied a 75% chance of the OCR being raised one more time. Their latest forecast lowers that risk to 40%. So there is a better-than-even chance that OCR’s next move is downward.

They also forecast that when the OCR does fall, it will go down more quickly than they thought back in November.

Will the Reserve Bank stick to their guns and hold the OCR until the end of the year?

The Reserve Bank only tends to stick closely to its own OCR forecasts for the first 6 or 7 months. Markets are currently pricing in an OCR cut, perhaps as early as September. Don’t dismiss that straight away. It is possible and would be consistent with the Reserve Bank’s track record of how closely they follow their own forecasts.

Prediction #2 – House prices will only go up 3.4% in the year to December

The Reserve Bank also updated its house price forecasts. They now think that house prices will be up 3.4% by the end of the year compared to last December.

That is slightly less house price growth than they expected 3 months ago. They have revised their forecasts down. Instead, they expect that prices will start to climb more quickly over the next few years.

Pay little attention to this forecast. It is just a guesstimate. Over the last 4 years, the bank’s house price forecasts (like everyone else’s) have been totally off. On average, the Reserve Bank tends to be 4.6% off.

So when they say that house prices could climb 3.4%, the actual figure could easily range between -1.2% and 8%.

Prediction #3 – “We should be seeing the banks working hard to win against one another.”

While not a formal forecast, the Reserve Bank’s announcements did bring welcome news for borrowers.

Commentators and some mortgage brokers have speculated that the Reserve Bank has had a private word with banks. Some thought the central bank was wielding its big stick, urging them to keep their rates high. The Reserve Bank has quashed that thought.

Answering a question from Jenée Tibshraeny from the NZ Herald, the Reserve Bank Governor said he is comfortable with mortgage rates decreasing. “Yes, it’s a competitive environment … banks will compete with each other on their pricing.”

He added, “I really do hope it’s competitive out there because I imagine it’s in a low-volume market as well. We should be seeing pricing pressures. We should be seeing margins tightening up. We should be seeing the banks working hard to win against one another.”

This is worth paying attention to. If the banks lower their interest rates, that won’t necessarily cause the Reserve Bank to worry about inflation.

That will bring some comfort to anyone with a mortgage.

All interest rates have fallen (by a small amount) over the last 3 months.

ASB cut their rates this week. Their 18-month rate dropped from 7.15% to 6.89%. That saves $20 a week on a $500,000 mortgage. It’s not much, but it’s a start.

It also comes after BNZ lowered their interest rates last week and Westpac a few weeks before that. These are small changes, but they show the direction of travel over the next year.