Market Insight – RBNZ Breakdown

The Reserve Bank of New Zealand maintained the official cash rate (OCR) at 5.5% during its July meeting, as expected. Wednesday’s decision came after the central bank raised borrowing costs by a total of 525 basis points since October 2021.

The board said that the level of interest rates was constraining spending and inflation pressures as required. It added that the OCR will need to stay at a restrictive level to bring inflation returns to the target range of 1 to 3% annually by H2 of 2024.

Last month the Reserve Bank of New Zealand lifted the official cash rate by 25bps to 5.5%, the highest since December 2008. It was the 12th straight rate hike, in line with market consensus, as consumer inflation, at 6.7% in Q1 of 2023, remained too high with many measures of inflation expectations staying elevated.

The committee judged the risks around the inflation projection were broadly balanced as supply constraints continue to ease. Meantime, employment stays above its sustainable level, but recent data suggest the labour market is easing.

Policymakers were aware that monetary policy in New Zealand reached a tightening level earlier than in many countries. Regarding the GDP, the board viewed that recent indicators suggest growth was likely to remain weak in the near term, despite rebuild work in the North Island.

The RBNZ Meeting Minutes was also released today, and the Minutes noted that the “Committee agreed that monetary conditions are restricting spending and reducing inflationary pressure as anticipated.”

Additionally, the Minutes revealed that the “Committee agreed that interest rates will need to remain at a restrictive level for the foreseeable future” and “Inflation remains too high.”

On employment, the Minutes noted that “Employment remains above its maximum sustainable level, however recent indicators suggest that labour market conditions are easing” and “Labour shortages have started to ease, partly in response to the recent arrival of more migrants.”