No cutting rates any time soon: Reserve Bank of New Zealand

A109 Light Utility Helicopter flight with mayor Gisborne City from the air in November 2023.

Opinion

Reserve Bank governor Adrian Orr surprised markets yesterday by dissuading them of any cuts to the official cash rate (OCR) next year and leaving the door open to a further hike in interest rates if inflationary pressures turn out to be stronger than anticipated.
Wholesale interest rate markets had been factoring in three cuts by early 2025, starting as early as May, so it was a hawkish stance from the RBNZ in its final monetary policy statement of the year that reaffirmed its focus on winning the battle against inflation. While the Monetary Policy Committee left the OCR at 5.5 percent, as expected and where it has been since May, it gave forward guidance that it didn’t expect to lower the cash rate until 2025.
The New Zealand dollar jumped half a cent against the US dollar to US62c on the news and wholesale interest rates rose, with the two-year swap rate up 13 basis points to 5.25 percent.
Inflation for the 12 months to September was 5.6 percent, according to Stats NZ, having come off a peak of 7.3 percent in mid-2022 which was the country’s worst inflation since 1990.
While inflation had eased due to the financial pressures from higher interest rates, “. . . ongoing excess demand and inflationary pressures are of concern, given the elevated level of core inflation,” the Monetary Policy Committee said in its statement.
“If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further.”
The surge in migration over the past year, and its impact in stoking demand, was cited as one concern.
Strong population growth had contributed to an increase in housing rents. House prices had stabilised after earlier declines, but factors such as population growth and increased nominal disposable incomes were offsetting the effect of higher debt servicing costs.
The committee noted that the new Government’s policy programme would have implications for economic activity and inflation. “Members agreed that this would be assessed as policies are formally incorporated into the Treasury’s official forecasts.”
Bank economists have responded by saying the RBNZ has successfully reset market expectations ahead of the long summer break and those would now ebb and flow with the data, particularly on the labour market and inflation expectations.
While more hawkish than expected, “. . . at the end of the day the committee acknowledged that there are risks in both directions and they will have to stay nimble as the economic picture evolves,” the ANZ said in a report.
The Reserve Bank’s new forecasts see inflation falling back into its 1-3 percent target band by September next year, and reaching the mid-point of 2 percent a year later.