The official cash rate (OCR) will be held at 5.5%, the Reserve Bank has announced, in line with expectations as inflation remains stubborn in parts of the economy.
Today’s decision marks the seventh consecutive time the central bank’s monetary policy committee has held the rate. The OCR has now been held at 5.5% for 12 months.
However, the central bank said it did discuss the “possibility of increasing the OCR” and said interest rates may need to stay restrictive for longer than expected.
“In the context of persistent domestic inflation, weaker productivity growth, and uncertainty regarding the pace of normalisation in wage and price-setting behaviour, the Committee discussed the possibility of increasing the OCR at this meeting,” it said in its summary of discussions.
“The Committee assessed that, while the near-term balance of risks around inflation are skewed to the upside, there is more confidence that inflation will decline to within the target range over the medium term. However, the Committee also agreed that interest rates may have to remain at a restrictive level for longer than anticipated in the February Monetary Policy Statement to ensure the inflation target is met.”
The Reserve Bank’s target range for inflation is between one and three per cent.
It said: “Restrictive monetary policy has reduced capacity pressures in the New Zealand economy and lowered consumer price inflation. Annual consumer price inflation is expected to return to within the committee’s 1-to-3% target range by the end of 2024.”
While the labour market cooled off and unemployment rose, higher dwelling rents, insurance costs, council rates, and other domestic services continued to fuel inflation.
The central bank also commented on the upcoming Budget.
“Our economic projections include only officially available information on the Government’s fiscal intentions to date, which includes the most recent fiscal update and ‘mini-budget’. The signalled lower government spending is currently and expected to continue contributing to weaker aggregate demand.
“Any impact of potential changes in the forthcoming Budget to government spending, or private spending due to tax cuts, remain to be assessed.”
Before the reveal of today’s decision, bank economists were confident that the central bank would hold the line with the rate of inflation remaining above the target range.
However, there was disagreement about when the OCR could begin to be lowered.
ASB chief economist Nick Tuffley said in an update last week that there was “some stickiness in inflation pressures” yet also “more subdued growth.”
“We continue to expect the Reserve Bank will wait until early 2025 before cutting interest rates, later than financial market pricing of at least one 25 basis point cut by year-end. As things sit with the inflation outlook, a cut this year seems too soon.”
On the contrary, Kiwibank economists wrote in an update last week that the bank remained optimistic cuts could come as soon as November.
“The Reserve Bank’s last OCR track indicates rate cuts by about mid-next year. While we instead continue to call for cuts to commence in November,” they said.
“We see inflation returning to within the Reserve Bank’s 1-3% target by the September quarter. Though it’s not until mid-October that we receive the data, and (hopefully) confirmation. Thus, leaving November as the earliest kick-off date for rate cuts.”
The Reserve Bank uses the official cash rate to influence economic activity and predominantly to keep inflation at its target levels. Last year, the OCR was raised to its highest level in over a decade amid rocketing inflation.
The OCR is the wholesale rate at which banks can borrow money. With high inflation, the bank has been aggressively raising the rate in order to cool down economic activity.
For savers, they’ll see better returns as interest rates rise, but borrowers will be forking out more in repayments. The general theory is when the OCR rises, it costs more to borrow money, encouraging people to save rather than spend.