Reserve Bank holds official cash rate at 5.5 percent

By earthnews
6 months Ago

Reserve Bank holds official cash rate at 5.5 percent

Navigation for News Categories

Photo: RNZ

The Reserve Bank has kept the official cash rate (OCR) at 5.5 percent but put the possibility of a rate increase back on the table.

In its updated forecasts, the bank predicts a 5.7 percent OCR peak at the end of this year.

That indicates that it believes that another increase remains a possibility. In the February update, the peak had been 5.6 percent.

A hike was discussed as an option in the latest meeting of the monetary policy committee.

Infometrics chief forecaster Gareth Kiernan said it was a surprise that a hike had been talked about.

“Given that the previous couple of statements they’d pretty much gone away from saying we think we might need to raise rates further and we think we’ve done enough. They’ve swung a bit back the other way again.”

Before Wednesday’s update, economists had been unanimous in their view that the rate would remain on hold.

Markets reacted to the changed tone, with one-year swap rates jumping from 5.33 percent just before the release to 5.41 percent soon after.

The bank said it still expected inflation to return to the 1 percent to 3 percent target range by the end of 2024 but committee members were wary about the possibility of a delay.

“The committee noted that annual headline CPI inflation was expected to return to the target band in the September quarter this year and that monetary policy settings are consistent with annual headline CPI inflation returning to the 2 percent target midpoint later in 2025.

“The committee noted, given current projections, there was limited tolerance to increase the time to the target mid-point. The committee is conscious that the economy has limited capacity to absorb further upside inflation surprises, as this could risk a rise in inflation expectations and make it more difficult to get inflation back to target.”

It said, although international inflation pressures were receding, domestic inflation was being held up by things such as rents, insurance costs and council rates.

It said the government’s slower spending was likely to contribute to weaker aggregate demand.

“Members agreed they remain confident that monetary policy is restricting demand. A further decline in capacity pressure is expected, supporting a continued decline in inflation. The committee agreed that interest rates need to remain at a restrictive level for a sustained period of time, to ensure annual consumer price inflation returns to the 1 percent to 3 percent target range.”

ASB chief economist Nick Tuffley said the update meant his team retained their view that OCR cuts would not happen until next February, but there was a risk it could be later.

He said the new OCR track implied that cuts would not happen until August next year, about three months later than had been implied in February. The bank would also be watching for any implications of the Budget.

“The Reserve Bank’s forecast is higher over the rest of 2024, barely getting back in the 1 percent to 3 percent target band by the end of 2024. The forecasts show inflation very near the 2 percent mid-point over the second half of 2025 but not hitting 2 percent until the first half of 2026, later than in February’s forecasts.”