- The Reserve Bank has held the official cash rate unchanged at 2.25 percent
- New governor Anna Breman has emphasised a 'laser focus' on low inflation
- Forecasts indicate the next OCR move will be a rise early next year
- The economy is improving, but the recovery is uneven
The Reserve Bank (RBNZ) has held its benchmark official cash rate (OCR) unchanged at 2.25 percent, saying it needs to get inflation under control, but does not want to upset the economic rebound.
The decision was expected and the central bank emphasised it was balancing the need to support economic recovery with stimulatory rate settings, while reducing inflation pressures.
Inflation reached 3.1 percent at the end of last year, above the RBNZ's target band.
"The committee is confident that inflation will fall to the 2 percent midpoint over the next 12 months due to spare capacity in the economy, modest wage growth, and core inflation within the target band," the Monetary Policy Committee (MPC) said in a statement.
It said economic growth was uneven and recovery would be gradual with a muted housing market, cautious domestic consumption, low migration, slow wage growth and a weak labour market weighing on inflation.
But a gradual fall in retail interest rates was feeding into household budgets and could spur stronger activity, with businesses looking to increase prices and keep up inflation.
"If the economy evolves as expected, monetary policy is likely to remain accommodative for some time."
"The committee will continue to assess incoming data carefully. As the recovery strengthens and inflation falls sustainably towards the target midpoint, monetary policy settings will gradually normalise."
The latest statement and forecasts pointed to an OCR rise most likely early next year.
The Reserve Bank's chief economist, Paul Conway, said urged households to stop being so cautious during the media conference on Wednesday.
He said house prices would be subdued in the coming year which would be a change for the economy to not have that.
"[We] do see this as a risk... [We] do need households to stop being cautious and get out and spend if we want to see the recovery continue to broaden."
Governor Dr Anna Breman said recovery was still at an early stage, and while unemployment remained high more people were entering the labour force which was a good sign.
She warned many households would not feel the impacts of the early stages of economic recovery yet.
"Data is showing us we're at the early stages and want to keep the OCR on hold."
There were no plans to hike the OCR until there were signs of a stronger economy, she said.
Breman said raising rates too early could dampen demand and household spending, but the forecast track for the OCR pointed to a possible rise before the end of the year, but more likely next year.
Economists said the RBNZ had played with a "straight bat" and struck the right balance in its reasons and forecasts.
Kiwibank chief economist Jarrod Kerr said Breman was a breath of fresh air.
"New Governor, Anna Breman, made her mark with an exceptionally simple, well delivered, statement and OCR track. Something which in the past, as recently as November, has not been well executed."
He agreed with a slow and considered approach to rate rises.
However, BNZ senior economist Doug Steel said data would shape future decisions, but they continued to think rates would rise earlier than the RBNZ is hinting at.
"We continue to expect the economy to expand, the output gap to close, and outlook for inflation to be sufficient to encourage the RBNZ to start lifting the OCR later in the year. We continue to see the first OCR hike in September."
However, the New Zealand dollar fell about half a cent against the US dollar after the statement, and wholesale interest rates were modestly lower.
Finance Minister Nicola Willis said the inflation figures were positive.
"What is positive in the update they have provided is their view of a strengthening economic outlook and their confidence that inflation will continue to fall and of course, the holding of the official cash rate at a level which is far, far lower than New Zealanders we have been experiencing in recent years and continues to support New Zealanders spending less on their mortgage than would otherwise be the case."
Asked if she was worried about signals rates might rise later this year, Willis said she was focused on ensuring the Reserve Bank delivered its mandate of low, stable inflation.
"It is the case that New Zealand had three years in which inflation was out of control and that led directly to the cost of living crisis, which we are still working to unwind.
"Governments need to support the Reserve Bank and our fiscal stance in which we are being careful in our spending means that they are able to hold interest rates lower than would otherwise be the case.
"As we approach the election, the question that I think should be in New Zealander's minds, is when I compare different parties, what effect will their spending plans have on interest rates?
"I recognise that labour have announced very little policy so far so it is hard to judge but judging on their opposition to any fiscal discipline, I'd suggest that their policies will be far worse for interest rates than ours."
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