NZ central bank hits pause at 5.5%, economists see easing in 2024

WELLINGTON  – New Zealand’s central bank held the cash rate steady at 5.5 percent on Wednesday, hitting pause as expected and flagging rates would be on hold for some time, with most economists still expecting rate cuts to come in 2024.

With the country in a technical recession, the RBNZ said the official cash rate (OCR) had constrained spending as anticipated but would need to stay high, as inflation is expected to fall into its target range only by the second half of next year.

“The Committee agreed that the OCR will need to remain at a restrictive level for the foreseeable future,” the RBNZ statement said, following the decision which had been unanimously expected in a Reuters poll of 25 economists.

The New Zealand dollar is currently trading 0.6 percent higher following the decision, but this is largely on broader weakness in the U.S. dollar.

A front-runner in withdrawing pandemic-era stimulus among its peers, the RBNZ has battled to curb inflation, lifting rates by 525 basis points over 20 months in the most aggressive tightening since the official cash rate was introduced in 1999.

ASB Bank chief economist Nick Tuffley said ASB remains of the view that the RBNZ has done enough to get inflation under control but will remain wary for the time being.

“We don’t expect OCR cuts until May next year, give or take,” Tuffley said in a client note.

New Zealand’s annual inflation has come off in recent months and is currently just below a three-decade high at 6.7 percent. Minutes from the monetary policy committee meeting said the committee expects inflation to decline to within the central bank’s 1 percent to 3 percent target by the second half of 2024.

“Consumer spending growth has eased and residential construction activity has declined, while house prices have returned to more sustainable levels,” the RBNZ’s statement said.

Capital Economics sees weakening economic conditions driving inflation down to the central bank’s target band in the first half of 2024, and as a result expects the RBNZ to start cutting rates in the first quarter of 2024, economist Abhijit Surya said in a note.