ASB still expected the first drop in the OCR to be a 25 basis point fall in November, but it says the risk now is that the cut could be sooner, or bigger, if inflation data comes in lower than expected. (file image) Photo: RNZ
A significantly softer tone from the Reserve Bank on Wednesday is good news for home loan borrowers - even if it has frustrated a few commentators.
The Reserve Bank left the official cash rate (OCR) at 5.5 percent but significantly changed the tone of its accompanying statement.
While in its last update, it said the monetary policy committee had talked about a potential further increase, this time it noted that inflation had been significantly reduced, and that the restrictive monetary policy - higher interest rates - would be tempered over time, in line with an "expected decline inflation pressures".
The markets responded to the change in tone.
Kiwibank chief economist Jarrod Kerr said a cut in the OCR was now priced in to wholesale markets from as early as August, with a full cut priced in for October and more than two for November.
Kiwibank chief economist Jarrod Kerr Photo: Supplied / Gino Demeer
"We've seen a massive move in markets today. And it's a move we welcome, and we have called for."
At ANZ, senior economist Miles Workman said the key would be that the markets remained at that level.
"In the past, we have tended to see retail rates move relatively quickly after large and sustained moves in wholesale markets. However, sustained is a key word here, and we still have next week's CPI release which has the potential to either endorse today's market reaction or challenge it."
Corelogic chief economist Kelvin Davidson said there could be "some light emerging" at the end of the mortgage rate tunnel.
"Although they might not necessarily fall straight away or particularly quickly, any drops would no doubt be welcomed by borrowers. To be fair, there's already been a drift lower for rates in the past few months, but OCR cuts would clearly add some impetus."
ASB said it still expected the first drop in the OCR to be a 25 basis point fall in November, but the risk was now that the cut could be sooner, or bigger, if inflation data came in lower than expected.
Infometrics chief executive Brad Olsen said the Reserve Bank would be mindful of how wholesale markets behaved, because they had got out of sync with the central bank at the start of the year.
Infometrics chief executive Brad Olsen Photo: RNZ / Samuel Rillstone
"I wouldn't expect to see too much movement [in retail rates] - to be fair we've already seen a 25 basis point decrease in the two-year rate over the last six months or so, rates have naturally been drifting lower."
But he said it was frustrating that the bank kept "flip-flopping".
"We've gone from 'maybe we increase interest rates' to 'hey guys, we're all on a pretty good pathway'."
He said it made it hard to understand the Reserve Bank's thinking.
But he said it was important to note the committee said it was confident that inflation would be back in the target range in the second half of 2024.
"If they're confident, and they're forward looking - they should be forward looking - that is quite a strong hint of where their thinking has moved to."
It would be interesting to see the OCR track in the next update, he said. If the bank really was expecting to cut the OCR this year, it would potentially need to pull in its forecast by as much as 10 months.
"If that's the case, they need to explain not only how they've got there but how their view is so materially different to what they thought in May. At the moment, I am not sure what side of bed they wake up on the morning, they seem to read the tea leaves very differently depending on what day it is."