Market Update: Reserve Bank’s dovish statement to pause mortgage rate hikes for now – Jenée Tibshraeny – Full Analysis

While an OCR of say 2.5% would still be “accommodative”, the signal from the MPC was that it wanted to sit tight and wait for lower interest rates to filter through the economy before lifting the OCR to a more neutral level.

Its position prompted swap rates, which affects banks’ fixed mortgage rates, to drop back a bit.

This suggests banks are unlikely to hike their interest rates in the near term.

As for the likelihood of mortgage and term deposit rates being cut, the falls in swap rates weren’t big enough to really put this possibility on the table – by late Wednesday afternoon, at least.

Of course, banks are always mindful of what their competitors do and tweak their interest rates accordingly. But the Reserve Bank gave them no reason to push rates higher – for now.

While Governor Anna Breman communicated clearly in her first appearance at a press conference after an OCR review, the elephant in the room was that her predecessor, Christian Hawkesby, accidentally sent fixed mortgage and term deposit rates up by about 30 basis points after the committee’s last meeting in November.

Hawkesby suggested, more firmly than expected by the market, that the committee was unlikely to cut the OCR again in this cycle.

This led to market participants getting ahead of themselves, pushing banks to start lifting their rates prematurely, and prompting Breman to make the relatively unusual move of talking the market down outside of routine monetary policy reviews.

Breman acknowledged the tighter financial conditions seen since November might have caused households to be cautious with their spending and impeded the economic recovery.

She declined to get into the weeds of the situation when asked whether the MPC was more dovish than it would have been had Hawkesby not sent retail interest rates north.

The average interest rate paid on the country’s stock of fixed mortgage debt was 5.11% in December.

Assistant Governor Karen Silk believed this figure would only fall by another 20 or 30 basis points in this cycle, as borrowers’ mortgages came up for renewal and they fixed at lower rates.

The impact of the Reserve Bank hiking the OCR to curb inflation post-pandemic hit hardest in September and October 2024, when the average rate paid on the country’s stock of fixed mortgage debt peaked at 6.34%.

Another issue the Reserve Bank raised was that house prices weren’t rising as much as they had during previous periods of low interest rates.

Accordingly, it expected the improving labour market to do more of the heavy lifting than the wealth effect to boost consumption in the economy.

Breman believed the unemployment rate would fall, and people would feel the effects of their wages/salaries rising more once inflation eased back.

Reserve Bank chief economist Paul Conway added New Zealand was starting to see growth broaden from regional to metropolitan New Zealand – from the agricultural to manufacturing and construction sectors.

However, he saw the reduced prominence of the wealth effect from higher house prices as a “risk” to the economic recovery.

“It’s a big change for the New Zealand economy to not have that increase in house price as that kicker to aggregate demand,” he said.

“There may well have been structural changes in the housing market that mean an increase in demand for housing no longer equates with higher house prices.”

The MPC will next review the OCR on April 8.

Breman said it would have eight, rather than seven, meetings next year, meaning there wouldn’t be such a long lag between OCR reviews as there was between the November 2025 and February 2026 reviews.

She justified the change, welcoming the fact Statistics New Zealand would start publishing inflation data monthly, rather than quarterly.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.