New Zealand Central Bank Holds Rates, Says Policy Needs to Stay Tight for While

NEW ZEALAND - WELLINGTON. New Zealand's central bank held the cash rate steady at 5.5% on Wednesday, as it reiterated that previous rate hikes had helped dampen prices but said that policy needs to remain restrictive for a while in order to bring inflation below its target band.

The decision was in line with expectations from 28 economists in a Reuters poll with all but one forecasting the Reserve Bank of New Zealand (RBNZ) would leave the cash rate at a 15-year high for the fourth consecutive meeting.

"The Committee remains confident that the current level of the OCR (official cash rate) is restricting demand. However, a sustained decline in capacity pressures in the New Zealand economy is required to ensure that headline inflation returns to the 1 to 3 percent target," the statement said.

"The OCR needs to remain at a restrictive level for a sustained period of time to ensure this occurs."

The New Zealand dollar fell 0.4% after the decision, reflecting a slim chance of a rate hike that had been priced in over recent weeks and as markets pared back expectations for an increase in coming meetings.

Read Also: Houthis Say They Can Reassess Red Sea Attacks if Israeli Aggression Stops

The central bank's rate forecast track also signaled a slightly more dovish outlook than some traders had anticipated. The RBNZ lowered its forecast cash rate peak to 5.6% from a previous projection of 5.7% - effectively reducing the risk of further tightening - and continues to foresee a cut until mid-2025.

“Members agreed they remain confident that monetary policy is restricting demand. A further decline in capacity pressure is expected, supporting a continued decline in inflation,” the central bank's minutes, which accompanied the policy statement, said.

A front-runner in withdrawing pandemic-era stimulus among its peers, the RBNZ has battled to curb inflation, lifting rates by 525 basis points since October 2021 in the most aggressive tightening since the official cash rate was introduced in 1999.

New Zealand's annual inflation has come off in recent months and is currently running at 4.7% with expectations that it will return to its target band of 1% to 3% in the second half of this year.

The rate hikes have sharply slowed the economy with recent data showing that it was tracking below previous central bank expectations. However, the unemployment rate in the fourth quarter of 2023 was slightly better at 4.0%, compared with an expected 4.2% rate.