The New Zealand central bank doesn’t plan to change the cash rate until 2025

Advertisements

On Wednesday, New Zealand’s central bank kept the cash rate at 5.5%, but pushed back when it plans to start lowering borrowing costs to 2025. This helped the New Zealand dollar.

“The committee agreed that the OCR (official cash rate) needs to stay at restrictive levels for the near future,” the bank said in its policy statement. “This is to make sure that annual consumer price inflation returns to the target range of 1% to 3%.”

It said that, based on its central economic outlook, the cash rate would have to stay around 5.5% for a little longer than was thought before in order to meet its inflation and job goals.

The RBNZ still thinks that the official cash rate (OCR) will stay at 5.5%, and the monetary policy review (MPR) that came with the rate decision says that there is a 40% chance that it will go up another 25 basis points to 5.75% in 2024.

Its current path shows that it doesn’t plan to cut until the first half of 2025. This is much later than what economists thought would happen, since they thought cuts would start in the second quarter of next year.

Mark Smith, a senior economist at ASB, said that it is hard for cash to move in either way because they have been working hard and fairly early, which has given them the freedom to wait.

“Still, they’ve made it clear that they won’t stand for inflation numbers that stay too high for too long,” he said.

After the statement, the New Zealand dollar rose from its lows to trade at $0.5963, up 0.2%. However, New Zealand bank bill futures fell as the market priced in a little more risk of another hike.

Since October 2021, the RBNZ has raised interest rates by 525 basis points, which is the most aggressive tightening since the official cash rate was established in 1999. This is because the RBNZ was one of the first central banks to pull back on stimulus during the pandemic.

In the past few months, New Zealand’s annual inflation has been going down. It is now at 6.0%, which is just below a 30-year high of 6.7%. It is expected to return to the central bank’s goal range of 1% to 3% by the second half of 2024.

The rate hikes have slowed the economy down a lot. After two quarters of no growth, the economy is now technically in a recession.

Paul Bloxham, the head economist for HSBC in Australia and New Zealand, said that the bank still thinks the central bank will cut rates in the second quarter of next year.

“Economic activity has definitely slowed, even though it has a bit more momentum than expected, and the economy is deflating. Also, the full effect of the tightening of the money supply that has already happened has yet to be felt by the economy,” he said in a study note.