Reserve Bank holds steady on official cash rate

Wednesday, 28 February 2024

The Reserve Bank of New Zealand has held its official cash rate at 5.5%

The Bank’s monetary policy committee, charged with setting the interest rate, said in its statement that slowing demand in the economy, which it expects to continue, meant that the current rate was doing its job.

“Core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced,” the bank said in the statement.

However, it warned that the current inflation rate - 4.7% - was still too far outside the bank’s target band of 1% to 3%, “limiting the Committee’s ability to tolerate upside inflation surprises”.

In a press conference after the statement, Governor Adrian Orr said that there had been “a strong consensus” amongst the committee to stay the course.

“We certainly didn't discuss a cut … on the table was a hold or do we need to do more?

“It was a very strong consensus that the official cash rate is doing sufficient and that the economy has been evolving as anticipated.”

The bank also sounded a warning that also it is confident that the current interest rate is restricting demand in the economy, that “sustained decline in capacity pressure” will be required to keep inflation on its current downward track.

“The OCR needs to remain at a restrictive level for a sustained period of time to ensure this occurs.”

Moody’s Analytics wrote in a note that it believes that the official cash rate has peaked and that rate cuts could be coming in the second half of the year.

“With the year likely to feature slow economic growth and falling inflation, the RBNZ should deliver a 25-basis point cut at its August meeting. If domestically driven inflation proves sluggish, that first loosening of monetary policy may be pushed back.”

The bank also pointed to “heightened geopolitical and climate condition” as a risk for inflation - which has hit global shipping costs. It said that the bank remains alert and “will act to limit spillovers into general inflation if necessary”.

Orr said that retail banks had been good at helping any financially stressed customers.

“But you know, the cost of living challenges become ‘a choice of living’ challenge here - that people are going to have to make significant budget choices in the period ahead with their banks.”

BNZ Research said in a note that it had expected the bank to hold, but that the bank’s language was “somewhat watered down form its November statement.”

“On inflation expectations, the central bank stated that most measures have declined. This is important as the Bank previously felt that its credibility was being questioned when inflation expectations were pushing higher,” BNZ Research said.

The decision came with the more hefty Monetary Policy Statement in which the bank produces a significant paper discussing the economic outlook and its deliberations.

Overall, it paints a picture of a slowing global economy but a still pretty frothy New Zealand economy, although now in which various pressures are slowly easing.

Immigration is a significant area that is being considered by the Government, but the monetary policy committee said that it is a two-sided picture, noting on one hand that “that strong net immigration is contributing to demand, with the recent increase in rent inflation an example”.

“However, net immigration also means that there are more workers available, boosting the supply capacity of the economy. Businesses are reporting that it has become much easier to find workers. In general, capacity pressures in the labour market have eased.”

The bank said that while the general inflationary outlook was more balanced, there is little slack for current monetary setting to absorb higher inflation.

“However, from a monetary policy perspective, there remains less capacity to absorb upside inflation surprises, relative to downside surprises,” the statement said.