Inflation Data and Its Impact on Home Loans in New Zealand

Inflation in New Zealand has reached its highest level in over a year, with the annual rate hitting 2.7% in the June quarter. While this figure may seem concerning for many, especially those grappling with higher council rates and rents, it may not significantly affect the trajectory of home loan rates or the official cash rate (OCR) in the near future.

Since the end of 2021, the Reserve Bank has been steadily increasing the OCR to curb rising inflation, which peaked at over 7% annually. However, the latest inflation data aligns with the Reserve Bank's expectations and is lower than some economists had predicted. This has led many to believe that a cut in the OCR is likely in August, potentially easing short-term borrowing costs for homebuyers.

According to Miles Workman, a senior economist at ANZ, the data does not present a barrier to further OCR cuts. He expects the Reserve Bank to reduce the OCR in August, November, and February, and suggests that the easing could arrive more quickly than initially anticipated. Workman noted that recent labor market data will be crucial in determining the pace of future cuts.

Kiwibank economists argue that the OCR should be cut further, to 2.5%, to help absorb economic slack, particularly in the labor market. Meanwhile, Westpac anticipates a 25 basis points (bps) cut in August but will closely monitor core inflation to gauge the strength of underlying price trends.

Gareth Kiernan from Infometrics believes that the Reserve Bank may need to stop at an OCR of 3%, citing signs that price pressures are more isolated than widespread. He emphasized that while there is room for further easing, it may be limited without additional signs of economic weakness.

ASB economists expect the OCR to be cut to 3% in August but caution that there are both upside and downside risks to the inflation outlook. They suggest that persistently high inflation could keep the OCR at 3.25%, while a prolonged economic downturn or global recession could push the OCR below 3%.

As the Reserve Bank continues to monitor inflation, the labor market, and broader economic indicators, the path for home loan rates remains uncertain. However, the expectation of further OCR cuts offers some relief for those looking to secure a mortgage in the coming months.