Lending Association

Reserve Bank of NZ holds steady at 5.5% OCR amid inflation concerns

As expected, the Reserve Bank of NZ has kept its official cash rate steady at 5.5%, showing little indication of imminent easing.

The central bank, in its post-meeting statement, emphasized its skepticism regarding a sustainable decrease in the Kiwi rate of inflation. Geopolitical factors, such as conflicts in the Middle East, pose inflation risks, while the sluggish state of China’s economy remains a concern. Additionally, there’s a possibility that central banks worldwide may need to maintain higher interest rates for an extended period to combat inflation.

The committee underscored the need for sustained declines in capacity pressures within the New Zealand economy to achieve the targeted inflation range of 1 to 3 percent. Consequently, no rate cuts are anticipated this year, with future movements contingent on data.

Although the New Zealand economy has largely followed the committee’s expectations over the past year, core inflation and inflation expectations have decreased. However, headline inflation remains above the target band, constraining the committee’s tolerance for upside inflation surprises.

Monetary policy, combined with global economic slowdown, has led to a moderation in aggregate demand, aligning it better with the economy’s supply capacity. Despite this, recent high population growth continues to support aggregate spending, exerting upward pressure on dwelling rents.

Internationally, the outlook for China’s economy remains weak, with structural factors hampering long-term growth. The possibility of central banks maintaining restrictive interest rates longer than anticipated poses a general risk to global growth.

Furthermore, geopolitical and climate-related conditions continue to pose inflation risks, with recent increases in global shipping costs highlighting these concerns. The committee remains vigilant and prepared to act to mitigate spillovers into general inflation if necessary.