The Reserve Bank of New Zealand (RBNZ) announced on Wednesday that it will be maintaining interest rates at the current level of 5.50%. Economists had predicted this decision, and the RBNZ emphasized that interest rates will need to remain high for a sustained period.
In a statement, the RBNZ expressed confidence that keeping interest rates restrictive for an extended period will lead to consumer price inflation returning to the target range of 1% to 3% per annum. Additionally, this approach will support maximum sustainable employment.
Although interest rate cuts were previously expected in late 2024, the RBNZ’s forward estimates now indicate that they will be delayed until early 2025. The expected trajectory for the official cash rate (OCR) also reveals a 40% chance of one further rate hike to 5.75% in the first half of 2024.
This decision comes at a time when the agriculture-rich New Zealand economy is experiencing a technical recession and an increase in unemployment. In the second quarter, unemployment rose to 3.6% from 3.4% in the previous quarter. The economy contracted by 0.1% in the first quarter and remained weak in the second quarter.
While other central banks around the world paused to assess the impact of prior tightening measures on their economies, the RBNZ has consistently taken a more hawkish stance in recent years, implementing substantial interest rate increases.
The RBNZ acknowledged that some sectors of the economy sensitive to interest rates are experiencing a slowdown. Labor shortages have eased as overall demand softens, and immigration has provided additional labor resources. Headline inflation and inflation expectations have decreased, although measures of core inflation remain stubbornly high.
The central bank also highlighted that there is a potential risk that activity and inflation measures may not slow as much as anticipated in the near-term.
