Reserve Bank holds Official Cash Rate at 5.5 percent

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Governor of the Reserve Bank Adrian Orr.
Photo: RNZ / Dom Thomas

The Reserve Bank has held the official cash rate (OCR) at 5.5 percent, but repeated concerns about stubborn inflation pressures and dashed hopes of early rate cuts.

Economists had expected the benchmark rate to be left unchanged for a fifth consecutive meeting, but acknowledged the risk of a surprise rise to put further pressure on domestic price pressures and get inflation back into the 1-3 percent target zone more quickly.

The central bank said inflation has eased to a two-year low of 4.7 percent as consumers and businesses trimmed spending, and labour market pressures eased because of a large influx of migrants.

“Core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced,” the Monetary Policy Committee (MPC) said in a statement.

“However, headline inflation remains above the 1 to 3 percent target band, limiting the committee’s ability to tolerate upside inflation surprises.”

It said the rate rises of the past two years were having the desired effect, and inflation would return to the target band in due course.

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

The RBNZ’s indicative forecasts for the OCR showed little prospect of a rate cut before mid-2025.

The central bank’s tone remained hawkish as it highlighted concerns the surge in migration would add to inflation pressures that remained by adding to demand for houses and services.

Over the past month, Governor Adrian Orr and chief economist Paul Conway had been talking up the inflation risks and dampening hopes for rate cuts, partly to send a message to banks and finance firms not to bet on early rate cuts this year.

The MPC also noted the softness in the Chinese economy and the broader risks for global growth, and the possibility central banks around the world will keep their interest rates higher for longer.

However, the statement was less aggressive in tone than the November monetary policy statement and there was no repeat of the threat to raise rates again.

Read the bank’s Monetary Policy Statement here.

Kiwi falls on announcement

The New Zealand dollar fell against its major trading partners, as the RBNZ statement dampened prospects of a rate hike, despite signalling rates will stay elevated throughout this year.

ASB chief economist Nick Tuffley said the central bank’s tone “wasn’t as hawkish as it could have been”.

“The OCR track still implies some chance of an OCR hike over the remainder of 2024, and is consistent with OCR cuts from around [the second quarter of] 2025,” he said.

“We continue to expect the RBNZ will cut the OCR in November, with the risks to that view appearing more balanced now that the RBNZ has signalled some degree of comfort with very conflicting signals in the key data out over the recent months.”

Westpac chief economist Kelly Eckhold felt the overall tone of the statement was “somewhat hawkish” but less than what the market was fearing.

“Even though the OCR was left unchanged this time, the RBNZ still sees a risk of a need for a higher OCR to 5.75 percent in [the third quarter of] this year,” Eckhold said.

“The RBNZ’s updated OCR track was lowered, implying around a 40 percent chance of a further OCR increase,” he said.

Eckhold said the RBNZ appeared “comfortable” with their strategy “for now”.

“Still sticky non-tradables inflation and a slowly adjusting labour market is keeping the RBNZ on their toes. Hence the RBNZ continues to see some risk of a further OCR increase in the next few months.”