In its recent monetary policy review, the Reserve Bank of New Zealand (RBNZ) decided to keep the Official Cash Rate (OCR) steady at 5.50%. This marks the end of nearly two years of consecutive increases in the OCR.
The RBNZ stated that the current level of interest rates is having the desired effect of controlling spending and keeping inflation in check. This decision was widely expected, as economists and traders had predicted that the benchmark interest rate would remain unchanged in July, based on the RBNZ’s previous statements.
Since October 2021, the Monetary Policy Committee had been consistently raising the OCR in every review, resulting in a total increase of 525 basis points. The OCR is now at its highest level since late 2008.
In May, the RBNZ expressed its belief that interest rates were already high enough to bring inflation back within the target range. The central bank signaled its intention to keep the OCR frozen until mid-2024.
The RBNZ acknowledged weak global economic growth and easing inflation pressures as factors influencing its decision. It noted a slowdown in consumer spending growth and a decline in residential construction activity, with house prices returning to more sustainable levels.
The next Monetary Policy Statement by the RBNZ will be published on 16 August. After that, there will be one more policy review before the general election in October. The last opportunity for the RBNZ to increase the OCR before February 2024 would be at the November monetary policy statement since there is no policy review during the summer.
The RBNZ’s full statement is below.
Official Cash Rate remains on hold
12 July 2023
The Monetary Policy Committee today agreed to leave the Official Cash Rate (OCR) at 5.50%.
The level of interest rates are constraining spending and inflation pressure as anticipated and required. The Committee agreed that the OCR will need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1 to 3% annual target range, while supporting maximum sustainable employment.
Global economic growth remains weak and inflation pressures are easing. This follows a period of significant monetary policy tightening by central banks internationally. Global inflation rates continue to decline, assisted by the normalisation of international supply chains, and the decline in shipping costs and energy prices. The weaker global growth has led to lower export prices for New Zealand’s goods.
In New Zealand, inflation is expected to continue to decline from its peak, and with it measures of inflation expectations. Core inflation is expected to decline as capacity constraints ease. While employment is above its maximum sustainable level, there are signs of labour market pressures dissipating and vacancies declining.
Consumer spending growth has eased and residential construction activity has declined, while house prices have returned to more sustainable levels. More generally, businesses are reporting slower demand for their goods and services, and weak investment intentions.
The return of net inward migration continues broadly as anticipated, and is assisting to ease labour shortages. The net impact of immigration on overall capacity pressures remains uncertain. The ongoing recovery in tourism spending is supporting demand.
The repair and rebuild underway in regions of the North Island due to severe weather events will support economic activity in the near term. Broader government spending is anticipated to decline in inflation-adjusted terms and in proportion to GDP.
The Committee is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range of 1 to 3% per annum, while supporting maximum sustainable employment.
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DISCLAIMER: The opinions expressed in this article are the author’s and shouldn’t be taken as financial advice, or a recommendation of any financial product.