Official Cash Rate (OCR) remains unchanged at 5.50%
The Reserve Bank left the Official Cash Rate (OCR) unchanged at 5.50% at its monetary policy review on Wednesday, ending almost two years of consecutive rate hikes.
“The level of interest rates are constraining spending and inflation pressure as anticipated and required,” it said in a statement.
Economists and traders had agreed the central bank would not increase the benchmark interest rate at its July meeting, as foreshadowed in its May Monetary Policy Statement.
The Monetary Policy Committee had increased the OCR in every review since October 2021 before today.
During that time, the cash rate was increased 525 basis points in a dozen consecutive decisions and is now at its highest level since late 2008 at 5.50%.
In May, the RBNZ said it believed interest rates were high enough to bring inflation back into the target range and signalled it would freeze the OCR until mid-2024.
On Wednesday, it said global economic growth remained weak and inflation pressures were easing following significant monetary policy tightening.
'Feeling comfortable'
Stephen Toplis, BNZ’s head of research, said the central bank would be “feeling comfortable” about the data released since May.
First quarter gross domestic product was weaker than expected, the quarterly survey of business opinion showed the labour shortage easing, while pricing intentions and inflation expectations have fallen.
However, some analysts are still predicting another 25 basis point hike before the end of the year. Markets were priced for an increase by November.
This view could be encouraged (or discouraged) by a Consumer Price Index (CPI) data release next week, which is likely to show an annual inflation rate of around 6% in the second quarter.
Annual inflation was running at 6.7% in the first quarter of 2023 and has been as high as 7.3%.
The Reserve Bank said it expects headline inflation to continue to decline from its peak and core inflation to also fall as capacity constraints ease.
“While employment is above its maximum sustainable level, there are signs of labour market pressures dissipating and vacancies declining,” it said.
The New Zealand economy is visibly starting to slow. GDP data puts NZ in a technical recession and the Crown Accounts are $2 billion short in tax revenue due to weak corporate profits.
Even employment is starting to waver, a recent Treasury economic update said some industries which had GDP contractions are now showing a fall in job growth.
Employment has fallen 1.1% in the professional, scientific, and administrative support services sector — which had the largest GDP contraction in the March quarter.
Similarly, the number of jobs in the manufacturing sector fell 0.3% in the May month after its GDP output contracted 1.1% in the March quarter.
The RBNZ said consumer spending growth had eased and residential construction activity had declined, as house prices had returned to “more sustainable levels”.
“More generally, businesses are reporting slower demand for their goods and services, and weak investment intentions,” it said.
The monetary policy committee said it was confident that CPI inflation would return to its 1% to 3% target range with interest rates remaining at a restrictive level for some time.
Market participants were expecting Wednesday’s decision and therefore the reaction was mild.
Swap rates were down roughly four to eight basis points across the curve and the New Zealand dollar was slightly higher, according to ANZ.
The central bank’s next Monetary Policy Statement will be published on 16 August. It then has one more policy review before the general election in October.
Its final opportunity to increase the OCR before February 2024 would be at the November monetary policy statement, as there is no policy review during the summer.
Sustainable house prices
The committee said that house prices had returned to more sustainable levels after recent falls.
“Higher net migration is supporting demand for housing but higher interest rates continue to exert downward pressure on housing demand,” it said.
House prices have stabilised in recent months and the committee said the outlook had become more balanced.
Sharon Zollner, chief economist at ANZ Bank, said this was a hat tip to housing data which had been firmer in recent months.
The committee's comments were an acknowledgement that the RBNZ’s forecast for house prices to continue to decline across the rest of the year now looks too pessimistic.
“With real house prices adjusted for income growth back around 2019 levels, that statement seems a little inconsistent with the debate that was raging back then. But what ‘sustainable’ means is a bit vague, providing some wriggle room,” Zollner said.
The RBNZ's full statement is below.
Official Cash Rate remains on hold
12 July 2023
”The Monetary Policy Committee today agreed to leave the Official Cash Rate (OCR) at 5.50%.
The level of interest rates are constraining spending and inflation pressure as anticipated and required. The Committee agreed that the OCR will need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1 to 3% annual target range, while supporting maximum sustainable employment.
Global economic growth remains weak and inflation pressures are easing. This follows a period of significant monetary policy tightening by central banks internationally. Global inflation rates continue to decline, assisted by the normalisation of international supply chains, and the decline in shipping costs and energy prices. The weaker global growth has led to lower export prices for New Zealand’s goods.
In New Zealand, inflation is expected to continue to decline from its peak, and with it measures of inflation expectations. Core inflation is expected to decline as capacity constraints ease. While employment is above its maximum sustainable level, there are signs of labour market pressures dissipating and vacancies declining.
Consumer spending growth has eased and residential construction activity has declined, while house prices have returned to more sustainable levels. More generally, businesses are reporting slower demand for their goods and services, and weak investment intentions.
The return of net inward migration continues broadly as anticipated, and is assisting to ease labour shortages. The net impact of immigration on overall capacity pressures remains uncertain. The ongoing recovery in tourism spending is supporting demand.
The repair and rebuild underway in regions of the North Island due to severe weather events will support economic activity in the near term. Broader government spending is anticipated to decline in inflation-adjusted terms and in proportion to GDP.
The Committee is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range of 1 to 3% per annum, while supporting maximum sustainable employment. “
Source: Interest.co.nz