Conway said recent economic data showed that the bank’s monetary policy was working, with economic growth and inflation slowing as expected. However, he was frank: There is still a long way to go to bring inflation back into the 1–3% target range. Although inflation fell to 4.7% in the final quarter of last year, domestically driven non-tradable inflation was higher than the Reserve Bank of New Zealand’s forecast of 5.9%.
Paul Conway, chief economist at the Reserve Bank of New Zealand
The New Zealand dollar rose against the US dollar following the speech.
Commenting on the speech, Infometrics chief executive Brad Olsen said nothing in it suggested that “the bank is working to change the situation of interest rates staying higher for longer and hopes to begin making more rate cuts soon”。He described it as “a gentle response to expectations of rate cuts”.
ANZ senior strategist David Croy believes that if the Reserve Bank of New Zealand departs from its tough stance, financial markets will double down on bets for multiple OCR cuts this year. That would cause wholesale interest rates, which influence mortgage and term deposit rates, to fall faster than the bank would like.
Indeed, Conway acknowledged that he had to choose his words carefully. He said he would not reveal anything about the possible future direction of the OCR.
Last week, Stats NZ released some good news: growth in New Zealand’s Consumer Price Index (CPI) slowed further, from 5.6% in the third quarter of last year to 4.7% in the fourth quarter. Many economists commented that although CPI inflation remained above the 1–3% target range, it was moving in the direction the Reserve Bank of New Zealand wanted. This not only offers hope of easing cost-of-living pressures for New Zealanders, but also reduces the likelihood of another OCR increase. It gives us reason to believe mortgage rates have peaked, although that also depends on the significant influence of overseas financial market conditions on New Zealand’s longer-term fixed rates.
Indeed, market discussion is increasingly focused on when the bank will cut the OCR, with many industry figures believing this could happen as early as August this year. If that proves correct, retail interest rates, such as mortgage and term deposit rates, could fall sooner.
The Reserve Bank of New Zealand recently announced a major change for property investors, proposing new debt-to-income ratio (DTI) restrictions on mortgage lending. The bank hopes to limit large loans to borrowers seeking high levels of debt relative to their incomes, protecting the stability of the financial system. The rules would link the amount property investors can borrow to their income.
The bank proposes allowing banks to lend up to 20% of residential lending to owner-occupiers with debt-to-income ratios above 6, and 20% of new lending to investors with debt-to-income ratios above 7. It would also allow more low-deposit lending, with deposits below 20% for owner-occupiers and below 30% for investors.
CoreLogic chief economist Kelvin Davidson said there were three key points to watch. First, the rules would be implemented alongside loan-to-value ratio (LVR) restrictions. Second, DTIs could have a relatively neutral effect on the market, as high mortgage rates are currently the main factor limiting borrowing. Third, the proposed policy changes could stimulate the housing market in the second half of the year by easing deposit requirements.
CoreLogic’s latest buyer classification data shows that first-home buyers accounted for 26% of property purchases in 2023, a record share, although actual transaction numbers did not reach a record. This reflected government incentives that greatly encouraged first-home buyers: they can use their KiwiSaver savings towards a deposit and avoid banks’ low-LVR lending restrictions. Meanwhile, the housing market remains far from the activity levels seen two years ago, with relatively little competition from other buyer groups, such as investors.
Kelvin Davidson said that although he did not expect large numbers of investors to enter the property market in 2024, investment properties appeared increasingly attractive. Rents were continuing to rise, deposit requirements were easing, mortgage rates were expected to fall, and the mortgage interest deductibility rate would return to 80%… So will the coming year belong to first-home buyers or investors? We will wait and see.
This week brings a fresh set of economic data, including Stats NZ’s employment figures for December last year and ANZ’s business and consumer confidence indices for January. Will these figures give us greater confidence in the economy’s future, or warn of an approaching recession? We will wait and see.