New Zealand Holds Rates, Signals Risk of Another Hike To Tame Inflation

New Zealand’s central bank kept interest rates unchanged for a second straight meeting but signaled a risk that it may need to hike them further to tame inflation.

(Bloomberg) — New Zealand’s central bank kept interest rates unchanged for a second straight meeting but signaled a risk that it may need to hike them further to tame inflation.

The Reserve Bank’s Monetary Policy Committee held the Official Cash Rate at 5.5% Wednesday in Wellington, as expected by economists. But the bank’s new forecasts show a slightly higher track for the OCR, implying a small chance of an increase, while rate cuts have been pushed from next year into 2025.

“The updated OCR track now shows around a 40% chance of one further rate hike to 5.75% in the first half of 2024,” said Kelly Eckhold, chief New Zealand economist at Westpac Banking Corp. in Auckland. This assessment “more closely matches our own view that there is still more work to be done to ensure inflation returns to the target range sufficiently quickly,” he said.

The RBNZ was at the forefront of the global post-pandemic tightening campaign and its moves from here will be closely watched for clues on how other central banks might behave. While latest indicators continue to point to a further loss of economic momentum in New Zealand, they also signal risks that price pressures could take longer to dissipate.

The New Zealand dollar rose after the RBNZ’s statement, reversing earlier declines, to be as much as 0.3% higher on the day at 59.68 US cents. Two-year swap rates advanced 2 basis points to 5.54%.

Orr ‘Comfortable’

Most economists think the OCR has peaked for this cycle and that the next move will be a cut. But Westpac and ANZ Bank New Zealand forecast one more quarter-percentage point hike will be necessary before the end of 2023.

The RBNZ’s updated forecasts show the average OCR rising to a peak of 5.59% in mid-2024 and falling to 5.5% by the end of that year and further in 2025. Its previous forecasts suggested rate cuts could start in the third quarter of 2024.

Speaking to reporters after its decision, RBNZ Governor Adrian Orr downplayed the significance of the higher forecast rate track, saying it was not forward guidance and policymakers are comfortable that the current settings will return inflation to their 1-3% target next year.

“I’d say on balance we are in a watch, worry and wait mode and we do need to see inflation continuing to decline,” he said. “Likewise, we need to be wary of doing too much.”

Inflation, currently at 6%, is projected to fall below 3% by the third quarter of 2024.

“In the near term, there is a risk that activity and inflation measures do not slow as much as expected,” the RBNZ said. “The Committee agreed that the OCR needs to stay at restrictive levels for the foreseeable future to ensure annual consumer price inflation returns to the 1-3% target range.” 

In its record of meeting, the policy committee noted that the estimate of the nominal neutral OCR has increased by 25 basis points to 2.25%, suggesting the need for a slightly higher rates to achieve the same level of constraint on activity.

“Although the governor was at pains to downplay the small lift in the OCR track as any kind of signal as to the likelihood of future moves, it was a small but clear step in the direction of further hikes,” said Sharon Zollner, chief New Zealand economist at ANZ in Auckland.

What Bloomberg Economics Says:

“The Reserve Bank of New Zealand’s hawkish tilt is all talk — we think it will cut rates sooner than it projects. A weakening economy and a sharper slowdown in inflation will shorten the pause.” 

—James McIntyre, economist.

To read the full note, click here

The RBNZ forecasts that the economy will enter another recession, albeit with relatively small contractions in the third and fourth quarters of this year.

Stephen Toplis, head of research at Bank of New Zealand in Wellington, said there’s a risk that the downturn is much more aggressive than anyone anticipates as commodity prices slump on waning Chinese demand and households curb spending due to higher mortgages rates. 

“What chance is there against this backdrop that the Reserve Bank would raise its cash rate any time soon?” he said. “Very little is what we would contend.”

–With assistance from Garfield Reynolds.

(The timeframe for an inflation forecast was corrected in a previous version of this story)

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