The Reserve Bank of Latest Zealand (RBNZ) today held the Official Cash Rate (OCR) at 2.25%, a decision widely anticipated by financial markets. The move comes as annual inflation sits at 3.1% for the December quarter, slightly above the RBNZ’s target range of 1-3%.
Governor Anna Breman, in her first monetary policy statement, signaled a shift in the central bank’s approach, indicating the period of interest rate reductions has concluded and future adjustments are more likely to be upward. This marks a reversal from the RBNZ’s November decision, which was likely the final rate cut of the previous cycle.
The RBNZ statement emphasized a balance between supporting the economic recovery and controlling inflation. The committee expressed confidence that inflation will fall to the 2% midpoint over the next 12 months, citing spare capacity in the economy, modest wage growth, and core inflation remaining within the target band. However, concerns remain about potentially persistent inflationary pressures.
Stephen Toplis, head of research at BNZ, noted worrying signs that inflation may not be as subdued as previously expected. Even as his bank anticipates the first rate hike in September – the most aggressive forecast among major banks – the RBNZ did not explicitly signal this timing today. ANZ chief economist Sharon Zollner suggested the central bank likely aims to avoid fueling market expectations of an imminent increase.
The decision follows a period of rising mortgage rates, even before today’s announcement, as wholesale rates increased and banks began adjusting longer-term rates. Breman’s appointment comes amid concerns about the potential impact of these rising rates on the New Zealand economy.
The RBNZ acknowledged an uneven economic recovery, characterized by a muted housing market, cautious consumer spending, low migration, sluggish wage growth, and a weak labor market. However, a gradual decline in retail interest rates is expected to provide some stimulus to household budgets and potentially spur increased economic activity.
Paul Conway, the RBNZ’s chief economist, urged households to reduce caution during a media conference following the announcement. The latest forecasts from the RBNZ point towards a potential OCR increase early next year, though the committee will continue to monitor incoming data closely. The central bank indicated that as the recovery strengthens and inflation sustainably approaches the 2% target, monetary policy settings will gradually normalize.
The New Zealand dollar Trade Weighted Index has appreciated, reflecting higher domestic interest rates and a weakening US dollar, according to the RBNZ.
