RBNZ keeps rates on hold, feels confident of beating inflation

After raising the official cash rate (OCR) 12 consecutive times between October 2021 and May 2023, the Reserve Bank of New Zealand has now kept the OCR at 5.50% at two consecutive meetings, in July and August.

In a statement announcing the August decision, the Monetary Policy Committee said the current level of interest rates was high enough to limit spending and therefore put downward pressure on inflation (which was 6.0% in the June quarter).

“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, while supporting maximum sustainable employment,” the Committee said.

“The New Zealand economy is evolving broadly as anticipated. Activity continues to slow in parts of the economy that are more sensitive to interest rates. Labour shortages are easing as overall demand softens and immigration adds to labour resources. Headline inflation and inflation expectations have declined, but measures of core inflation remain too high.”

Interest rates will remain high “for some time”

Globally, headline inflation was falling in most of New Zealand's trading partners, but core inflation remained elevated. At the same time, weakening economic growth was putting downward pressure on New Zealand export prices, according to the Committee.

The Committee also said that, in New Zealand, the imbalance between demand and supply was moderating. “However, a prolonged period of subdued spending growth is still required to better match the supply capacity of the economy and reduce inflation pressure,” it added.

“In the near term, there is a risk that activity and inflation measures do not slow as much as expected. Over the medium-term, a greater slowdown in global economic demand, particularly in China, could weigh more on commodity prices and overall New Zealand export revenue,” the Committee said.  

“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 1-3% per annum, while supporting maximum sustainable employment.”