Outlook for Borrowers: Post August MPS
The Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate (OCR) by 25bps to 5.25% at the Monetary Policy Statement (MPS) on Wednesday. Although the consensus expected rates to remain steady, a significant minority including the BNZ, forecast a 25bps cut. The overnight index swap (OIS) market was pricing an approximate 70% chance of 25bps cut ahead of the decision.
Outlook for Borrowers: Post July MPR
• The RBNZ left the cash rate unchanged at 5.5% at the July MPR which was unanimously expected by economists.
• However, the accompanying statement showed a distinct change in tone from May, and seemingly opens the way for a lower OCR in coming months.
• There was no discussion of a rate hike, and the Bank noted that restrictive monetary policy has ‘significantly reduced consumer price inflation’.
• We have updated our OCR forecast post-MPR and expect the easing cycle will begin in November. However, an earlier rate cut cannot be ruled out.
• The market is pricing the first 25bps rate cut by October, and close to 60bps of easing by November.
• The extent of RBNZ easing priced by the market could limit the near-term downside for 2 and 5-year fixed rates.
• Current levels are attractive to top up fixed rate exposure.
• Global central banks, including the RBNZ, are at the beginning of a synchronised easing cycle, which suggests lower fixed rates, over the medium term.