MNI INTERVIEW: RBNZ To Keep OCR Steady - McDermott

The Reserve Bank of New Zealand’s hawkish tone late last year pushed fixed mortgage rates higher despite a 25-basis-point cut to the Official Cash Rate, effectively tightening financial conditions and reducing the need for further near-term rate changes, a former assistant governor told MNI, noting that a stronger New Zealand dollar will add to that restraint.

The Bank’s hawkishness at its November meeting and within its forecasts was premature as the economic recovery had not yet reached “escape velocity,” said John McDermott, executive director at Motu Economic and Public Policy Research and an RBNZ assistant governor until 2019. (See MNI RBNZ WATCH: Easing Bias Maintained, But 2026 Hold Likely)

“[The economy] is still struggling, and there’s a lot of surplus capacity around, so it’s less than clear that the recovery could handle higher mortgage rates,” he said, pointing to the 5.4% unemployment rate in the fourth quarter.

McDermott said the stronger New Zealand dollar, which has appreciated about 4% against the greenback year to date, was a mixed blessing, noting exporters are likely to feel some pain after being largely spared from 2025's trade disruptions. “We’ve seen quite a considerable tightening in monetary conditions. [Fixed] mortgage rates have gone up and the exchange rate has appreciated, so it’s a real question whether that could damage the recovery,” he said. “That’s an interesting set of circumstances and one that should keep the Reserve Bank very cautious.”

OCR ON HOLD

Markets see no February hike, with any tightening deferred to later in the year and a 2.67% policy rate priced in by December. McDermott noted this scenario assumes the recovery becomes more self-sustaining and interest rates gradually normalise.

“But given the exchange rate appreciation and the rise in mortgage rates, you’ve already had an effective tightening,” McDermott said. “The recovery looks patchy at best, so the Bank should be sitting back and watching.”

Inflation pressures also appear contained, he added, noting CPI is around 3.1%, just above the top of the 1-3% target band. “There doesn’t feel like there’s ongoing inflationary pressure,” McDermott said. “Unemployment has ticked up, there’s surplus capacity, and it’s hard to imagine prices getting away from the RBNZ.”

With inflation expected to return to within the target band over the course of the year without further policy action, McDermott said the Bank should retain maximum flexibility. “You have surplus capacity, an appreciating currency and higher mortgage rates already in place,” he said. “All the conditions for inflation to come back in line are there.”