29 Nov 2023

Reserve Bank keeps official cash rate at 5.5 percent

2:02 pm on 29 November 2023
Reserve Bank of New Zealand office and OCR text

File image. Photo: RNZ

The Reserve Bank has left its benchmark interest rate unchanged, as expected, and repeated that rates will stay high for an extended period.

The Official Cash Rate (OCR) was held at 5.5 percent, where it has been since May, with the RBNZ repeating that inflation was slowing under the pressure of its rate rises, but that it still remained too high.

"However, ongoing excess demand and inflationary pressures are of concern, given the elevated level of core inflation," the Monetary Policy Committee said in a statement.

"If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further."

The committee said the surge in migration was now posing threats to inflation by stoking demand in the economy.

The reference of a possible further hike was also aimed at financial markets which have been pricing in the chance of rate cuts as early as May next year.

The RBNZ's forecast track for the OCR published alongside the statement pointed to no prospect of cuts before 2025.

"Interest rates will need to remain at a restrictive level for a sustained period of time, so that consumer price inflation returns to target and to support maximum sustainable employment," the committee said.

Other forecasts showed inflation returning to the 1-3 percent target band in the second half of next year, while the economy posted low growth for the first half of next year.

The New Zealand dollar gained close to half a cent against the US dollar after the statement on the threat of a possible rate rise.

Economists had expected the OCR to stay where it was, with inflation falling from last year's peak but at 5.6 percent, still well above the target range of 1-3 percent.

Hawkish hold

ASB economists labelled the statement as hawkish, with the RBNZ showing more concern about the upside risks to inflation.

"The RBNZ statement hammered home the message that interest rates need to remain high for a sustained period, and with some risk a further OCR increase would be needed if inflation pressures turn out to be persistently stronger than expected," ASB chief economist Nick Tuffley said.

"This message was a shot across the bows of those picking a relatively swift start to the eventual easing cycle."

ASB continued to expect the RBNZ would hold the cash rate at 5.5 percent, with no cuts until early 2025.

"But the balance of risks around that view now looks more even than we had been thinking ahead of the statement," Tuffley said.

Westpac chief economist Kelly Eckhold said his first impression was that the RBNZ was concerned further rate increases might be needed towards the middle of next year.

"Key will be migration and housing market indicators over the next few months and the next couple of CPI outturns. The new government's fiscal projections in the HYEFU [half-year economic and fiscal update] before Christmas will also be a key focus," he said.

ANZ economists agreed the RBNZ was "more hawkish" than expected.

"As long as the threat of another hike is live, there is a limit to how far the market can rally. And we suspect that was an objective today," they said.

Infometrics chief forecaster Gareth Kiernan said the statement was "another significant change of tone" from the central bank's previous statement in October.

"This statement puts financial markets on notice over summer, and persistent strength in demand between now and the next review on 28 February could lead to a rate hike in early 2024," he said.

"At this stage, our view is that the bank is 'jawboning' markets and is trying to ensure that interest rate cuts are not priced in by the market prematurely."

PM wieghs in

Speaking at his first pst-Cabinet media briefing, Prime Minister Christopher Luxon said "It was incredibly disappointing to see the Reserve Bank having to say we may have to take interest rates higher, essentially because of the abysmal economic management of the last Labour government.

"There has been economic vandalism on a scale that we have not seen before."

Asked what concrete things he was going to do to resolve the domestic-driven inflation, he said they had three more Cabinet meetings and a schedule outlined "making sure that we're getting very intentional, and we're driving the wasteful spending programme and getting the wasteful spending out of the system".

He met with the Reserve Bank governor yesterday, he said.

"We are united on a goal of going after inflation. He can only go so far if we have our fiscal situation sorted and under control, and that's why we need to go through government spending."

The meeting with the Reserve Bank governor and the Secretary of the Treasury was constructive and positive and Luxon had confidence in the central bank to bring inflation down, he said.

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