Reserve Bank keeps official cash rate on hold at 5.5%

Wednesday, 4 October 2023

October 17, when Stats NZ releases inflation numbers for the September quarter, is shaping up as a key date in determining whether mortgage holders can expect much more pain.

The Reserve Bank has decided to keep the official cash rate unchanged at 5.5% after reviewing its monetary policy.

It also gave no strong signal that further rate rises might be on the cards, instead saying simply that interest rates “may need to remain at a restrictive level for a more sustained period of time”.

Economists have been divided on whether the bank might decide to raise the OCR when it issues its next monetary policy statement on November 29.

But the bank’s statement on Wednesday appears in line with the thinking of those who believe that may not be necessary.

ANZ was among banks that had expected the Reserve Bank to announce a “hawkish hold” on interest rates, but the announcement from the central bank was a hold with not much hawk.

What does the official cash rate mean?

The New Zealand dollar fell by about a quarter of a US cent in the wake of the Reserve Bank’s statement, indicating traders viewed it as more “dovish” than expected.

The Reserve Bank introduced its decision by saying that interest rates were “constraining economic activity and reducing inflationary pressure as required”.

Demand growth in the economy continued to ease and while GDP growth in the June quarter was stronger than anticipated, the growth outlook remained subdued, it said.

“With monetary conditions remaining restrictive, spending growth is expected to decline further.”

The Reserve Bank also noted that, globally, economic growth remained “below trend” and that most of New Zealand’s trading partners had seen headline inflation ease.

Weakening global demand was putting downward pressure on New Zealand export volumes and prices and, apart from oil, global import prices had eased, it said.

The closest the Reserve Bank came to acknowledging a possible need for tighter monetary policy was a warning that a prolonged period of subdued activity was required to reduce inflationary pressure, and that there was “a near-term risk that activity and inflation do not slow as much as needed”.

Over the medium term, a greater slowdown in global economic demand, particularly in China, could weigh more on commodity prices and New Zealand export revenue, it said.

“While global growth has been resilient in recent months this momentum is beginning to fade.”

The Reserve Bank appeared little moved by signs of a nascent recovery in the housing market, saying that while “house prices were slightly higher” that was on low sales volumes.