The central bank of New Zealand has opted to maintain its cash rate at the current level of 5.5% as of Wednesday. However, there has been a slight adjustment in the timeline for potential future reductions in borrowing costs, which has provided some level of support for the New Zealand dollar.
The bank’s policy statement explained that the decision to keep the official cash rate (OCR) at restrictive levels is aimed at ensuring that annual consumer price inflation aligns with the target range of 1% to 3%. According to the bank, based on its central economic outlook, it is anticipated that the cash rate will need to remain around the current 5.5% level for a slightly extended period compared to previous assumptions. This adjustment is deemed necessary to achieve the objectives related to inflation and employment.
In the accompanying monetary policy review (MPR) that accompanied the rate decision, the Reserve Bank of New Zealand (RBNZ) projects that the official cash rate will continue at 5.5%, with approximately a 40% probability of another 25 basis point increase to 5.75% in 2024.
The timeline for potential rate cuts has been extended, with the RBNZ now signalling that it is not anticipating any cuts until the first half of 2025. This timeframe is notably later than predictions made by economists, who had foreseen rate reductions to commence in the second quarter of the following year.
Market response to the announcement saw the New Zealand dollar recover from its previous lows, rising by 0.2% to reach $0.5963. In contrast, New Zealand bank bill futures experienced a decline as the market incorporated a slightly higher degree of risk associated with another rate hike.
The RBNZ has been at the forefront of scaling back pandemic-related stimulus among its global counterparts. To combat inflation, it has raised rates by 525 basis points since October 2021, representing one of the most pronounced tightening measures since the inception of the official cash rate in 1999.
Although New Zealand’s annual inflation has moderated in recent months, currently standing at 6.0%—just below the three-decade peak of 6.7%—expectations are that it will return to the central bank’s target range of 1% to 3% by the second half of 2024. The series of rate hikes has significantly slowed down the economy, leading to a technical recession due to two consecutive quarters of negative growth.
While economic activity has visibly decelerated, Paul Bloxham, HSBC’s chief economist for Australia and New Zealand, expressed the expectation that the central bank will initiate rate cuts in the second quarter of the next year. He noted that economic growth has indeed slowed, although it still maintains some momentum, and the impact of the previous monetary tightening is yet to fully manifest in the economy.
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