Reserve Bank holds official cash rate at 5.5%

Wednesday, 10 April 2024

The Reserve Bank has held the official cash rate at 5.5% in a move widely expected.

The New Zealand economy continues to evolve as anticipated by the Monetary Policy Committee, the central bank said in its Monetary Policy Review.

Inflation remained at above the banks’ 1 to 3% target range, “A restrictive monetary policy stance remains necessary to further reduce capacity pressures and inflation.

“Globally, while there are differences across regions, economic growth remains below trend and is expected to remain subdued. However, most major central banks are cautious about easing monetary policy given the ongoing risk of persistent inflation,” the central bank said on Wednesday.

“Economic growth in New Zealand remains weak. While some near-term price pressures remain, the committee is confident that maintaining the OCR at a restrictive level for a sustained period will return consumer price inflation to within the 1 to 3% target range this calendar year.”

Kiwibank chief economist Jarrod Kerr said call from some in the market for official cash rate cuts (OCR) in August, “that’s premature in our view”.

The Reserve Bank would need to see inflation below 3% before contemplating cuts, Kerr said in a note.

“And the earliest that will happen is October, when the third quarter inflation report is published. So that means the first reasonable chance of a rate cut is November.”

Wholesale interest rates markets have been volatile in recent months, and overly optimistic pricing for cuts near-term, but the lack of cuts longer-term, he said.

While the OCR was unlikely to be cut before November the market had more than two cuts priced.

“By this time next year, the market has 100 basis points of cuts priced. It’s all a little too optimistic,” Kerr said.

The two-year swap rate, used by banks to hedge two-year fixed rate mortgage flow, was below 5% and trading at 4.92% – unchanged by the Reserve Bank’s statement.

The New Zealand dollar was largely unchanged after the statement at US60.65 cents and A91.58c

ANZ chief economist Sharon Zollner believed inflation would fall a little more slowly than the Reserve Bank expected and that there would be no cuts to the OCR until next year.

Weakness in demand and activity in the fourth quarter GDP and the first quarter NZIER business confidence survey “has no doubt reinforced the Reserve Bank’s confidence that domestic inflation is on track to ease meaningfully over the coming quarters”.

“The news is less comforting on the global inflation front with the oil price markedly higher,” Zolner said.

If domestic inflation proved sticker than expected, or there was evidence of pressure on prices and inflation expectations the Reserve Bank could have a problem, she said.

CoreLogic chief property economist Kelvin Davidson said the decision to leave the official cash rate (OCR) unchanged was no surprise, given the flow of economic data released since its last decision in late February had not emphatically moved.

All eyes would now turn to the next consumer price inflation data release, covering the first quarter of 2024, due on April 17.

The decision would make little difference to the housing market the number of sales and values likely to continue to rise, but at slow rates, continuing a pattern for the early part of 2024, Davidson said.