Official Cash Rate staying at 5.5%, but Reserve Bank strikes more dovish tone
Wednesday, 10 July 2024
Economists are more hopeful that the Reserve Bank might start cutting interest rates later this year after it struck a more dovish tone in a review of its monetary policy.
The bank left the official cash rate unchanged at 5.5% on Wednesday, continuing to dish out tough medicine to the economy as it battles to bring down inflation.
However, it tempered its language on the inflation outlook, emphasising it expected headline inflation to return to within the 1% to 3% band in the second half of this year.
The tone of its comments prompted BNZ to join ASB and Kiwibank in forecasting the Reserve Bank would start cutting interest rates in November.
BNZ research head Stephen Toplis said it was the “dovish pivot we’ve been waiting for”.
The Reserve Bank said some domestically generated price pressures remained strong, but there were signs inflation persistence would “ease in line with the fall in capacity pressures and business pricing intentions”.
In some of its most dovish comments, the bank said there was now more evidence of excess productive capacity emerging in the economy, with measures of capacity utilisation and difficulty finding labour “easing materially”.
Recent data suggested the near-term growth in business activity had weakened, it also said.
Measures of domestic inflation remained more persistent than overall inflation, which takes into account the prices of imported goods and services, but “growing excess capacity in the domestic economy provides greater certainty that they will sustainably decline”, it said.
The bank said its monetary policy committee agreed monetary policy would need to remain restrictive, but it removed language it has previously used that said that would need to be for a “sustained period”.
“The extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures”, it added.
Currency markets — which are commonly the first to pass judgement on monetary policy reviews and statements — appeared to interpret the bank’s comments as suggesting rate cuts were closer than thought.
The New Zealand dollar fell about a third of a US cent soon after it was released.
Capital Economics economist Abhijit Surya said it now had greater confidence the bank would start lowering the official cash rate in November, describing its commentary as “rather dovish”.
Kiwibank chief economist Jarrod Kerr had a similar take.
ASB chief economist Nick Tuffley said it was hoping to see some signs that the Reserve Bank was getting more comfortable about the inflation outlook “and these showed through strongly”.
The review has been the first opportunity for the bank to make any substantive comment about the May Budget and tax relief.
“Current and expected government spending will restrain overall spending in the economy. However, the positive impact of the pending tax cuts on private spending is less certain,” it said.
Although the bank won’t issue its next monetary policy statement until August 14, the next key date for borrowers and savers hoping for clues on when interest rates may start to fall isn’t far away.
Next Wednesday, Stats NZ will publish its estimate of inflation during the second quarter of this year.
The Reserve Bank signalled in February that it expected annual inflation to come in at 3.2%, but any major surprise could be expected to influence the interest-rate outlook.