OCR Decision Analysis

On Wednesday, we had the first OCR decision under the leadership of Governor Breman, and as expected, the Reserve Bank left the OCR unchanged. But for markets and ourselves, the decision itself mattered less than the forecasts and the tone of the statement, because this was our first real chance to get some insight into how Governor Breman's "laser focus" on inflation would actually work in practice.

A Pragmatic Shift in Policy

What stood out for us was a pragmatic approach to monetary policy. The bank is placing greater trust in its forecasts that inflation will moderate, rather than reacting aggressively to a near-term spike in inflation. It's prepared to let the early signs of recovery develop and take hold, keeping policy accommodative for now to support that sustained growth environment.

This marks a shift from the "least regrets" approach we saw under Governor Orr, where policy moved quickly and aggressively with limited time to observe the reaction in the economy. Under Governor Breman, this reaction function is different:

• Smaller moves: Likely smaller incremental changes.

• Patience: More time to assess outcomes.

• Data-driven: A greater willingness to let the data play out.

Outlook for Interest Rates

Importantly, a more measured approach does not mean the bank is dovish. The next move in the OCR still looks likely to be up, but the pace and scale of the tightening now appear more gradual. Rather than frontloading the hikes in response to a spike in inflation, the bank seems more comfortable reviewing the impact of its policies over time. That's a subtle but important change for markets.

Impact on the Mortgage Market

For the mortgage market, today's decision should offer some near-term relief. Rates have already moved higher on the expectation that the OCR would rise over time. But if the increases are going to be delivered more gradually and in smaller steps, the path higher might be less aggressive than initially feared.

This will create opportunities for borrowers to term out their loans, particularly if they're coming from a floating rate product, given mortgages are still relatively low in terms of rate by historic standards.

Conclusion: A Smoother Cycle

Overall, today's decision was in line with our expectations, but perhaps more dovish than others in the market were expecting. While some saw potential for hikes as early as mid-year, we saw a measured, patient, and deliberate approach.

The bank acknowledged improving growth and elevated inflation risks, but remains comfortable that inflation would come back down inside the band. Notably, we saw an OCR track that only ended at 3%, which is lower than some feared. This slower approach looks consistent with how the Reserve Bank of Australia manages policy. It might mean lower peaks and lower troughs in settings—a good thing for the economy, providing more certainty for businesses, borrowers, and consumers.