RBNZ Set to Hold Interest Rates, Flag Ongoing Need for Restrictive Policy

New Zealand’s central bank will keep interest rates unchanged for a second straight meeting and flag the need for policy to remain restrictive for some time, even as the economy stalls.

(Bloomberg) — New Zealand’s central bank will keep interest rates unchanged for a second straight meeting and flag the need for policy to remain restrictive for some time, even as the economy stalls.

The Reserve Bank will hold its Official Cash Rate at 5.5% Wednesday in Wellington, according to all 20 economists in a Bloomberg survey. The RBNZ is also expected to maintain its forecast that the OCR will stay at that level well into 2024.

After raising rates for 12 consecutive meetings, the RBNZ stood pat in July saying a weaker economy was starting to damp price pressures. Since then, indicators have pointed to a further loss of economic momentum, but also to the risk that inflation takes longer than expected to return to the central bank’s 1-3% target. 

“The Reserve Bank will be very aware of these two-sided risks,” said Stephen Toplis, head of research at Bank of New Zealand in Wellington. “At the moment, the risk profile is very marginally tilted to the hawkish side but certainly not so much that the RBNZ would act on it.” 

Most economists think the OCR has peaked for this cycle and that the next move will be a cut, possibly in the first half of next year. Still, ANZ Bank New Zealand and Westpac Banking Corp. expect one more quarter-percentage point hike will be necessary before the end of 2023.

New Forecasts

The RBNZ publishes its decision at 2 p.m. local time Wednesday and Governor Adrian Orr holds a press conference an hour later. The bank will release new forecasts in its quarterly Monetary Policy Statement, including an updated track of where it expects the OCR to be over the next three years.

In May, the RBNZ projected the benchmark would remain at 5.5% until the third quarter of next year, which is also when it tipped inflation would fall below 3%. 

Economic growth remains key for the inflation outlook and the view of most analysts is that activity is set to slow further in the second half of 2023 and into next year.

Higher interest rates are yet to fully impact home owners because many are on fixed-term loans taken out when the OCR was at record lows in 2020 and 2021. As those borrowers progressively roll onto new deals at much higher rates, consumer spending is tipped to slow.

“We do have interest rates at a substantially higher level and over the rest of this year there’s going to be quite a lot of re-fixing happening, so there’s a lot more tightening still to come for households,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “Spending is certainly feeling the pressure.”

Manufacturing has contracted for five straight months, its worst slump since the global financial crisis. House prices are 10% lower than a year ago and sales volumes are subdued, and that is damping construction.

Chinese Demand

The global economic outlook is also gloomy. Waning Chinese demand for commodities has rippled through to New Zealand with Fonterra Cooperative Group predicting its payment to local farmers for milk could drop 15% from the previous season. Farm confidence has slumped to a record-low, which has implications for rural spending and investment.

A surge in immigration and the gradual recovery of inbound tourism may soften the blow. The jump in foreign workers is also starting to take pressure off wage inflation. 

Headline inflation slowed further to 6% in the second quarter. Still, the decline was less than expected and a gauge of domestic price pressures remained elevated. 

Two-year ahead inflation expectations at 2.83% are closer to the top of the RBNZ’s target band than the midpoint, and food prices rose 9.6% in the year through July.

For some, like ANZ’s Auckland-based New Zealand Chief Economist Sharon Zollner, that suggests the RBNZ shouldn’t be complacent that it has beaten inflation. She continues to call for a final rate hike in November. 

“For now, the RBNZ can take some comfort in the gradual downtrend in inflation expectations in recent months,” Zollner said. “That said, measures remain well in excess of target and more progress will be needed for the RBNZ to be confident that rates are sufficiently restrictive.”

–With assistance from Tomoko Sato.

More stories like this are available on bloomberg.com

©2023 Bloomberg L.P.