New Zealand’s central bank raised interest rates by a quarter-percentage point and unexpectedly signaled that no further policy tightening will be needed to tame inflation, sending the nation’s currency tumbling.
(Bloomberg) — New Zealand’s central bank raised interest rates by a quarter-percentage point and unexpectedly signaled that no further policy tightening will be needed to tame inflation, sending the nation’s currency tumbling.
The Reserve Bank’s Monetary Policy Committee lifted the Official Cash Rate to 5.5% from 5.25% on Wednesday in Wellington, as expected by 18 of 21 economists surveyed by Bloomberg. The central bank’s forecasts show the OCR has now peaked, with cuts beginning in the third quarter of 2024.
The kiwi dropped as much as 1.3% to its lowest since May 2 as traders were surprised by the MPC’s decision not to keep the door open to further tightening. The currency bought 61.68 US cents at 4:22 p.m. in Wellington. The yield on policy-sensitive 2-year bonds dropped the most in six months.
New Zealand has been in the vanguard of global tightening, with its 525 basis points of rate hikes outpacing even the US Federal Reserve. The RBNZ has been trying to rein in a sharp burst of inflation and Wednesday’s decision suggests it’s now relying on the lagged impact of higher borrowing costs to keep cooling consumer prices.
“The real surprise for the market was the RBNZ effectively declaring ‘mission accomplished’ on rate hikes,” said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities in Singapore. “Quite clearly this is a board that is content moving to the sidelines, letting prior rate hikes and expectations of the economy entering recession to naturally drive inflation down.”
Still, the bank’s forecasts now show a shallower economic slowdown, with only a mild recession projected for the second and third quarters of this year.
“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,” the RBNZ said. “Inflation is expected to continue to decline from its peak and with it measures of inflation expectations.”
Inflation slowed to 6.7% in the first quarter and the central bank predicts it will return to its target band by the third quarter of next year. Most economists expected it to keep the door open for a further rate increase if needed, arguing that surging immigration and looser fiscal policy will add to price pressures.
By contrast, the MPC’s record of meeting showed members discussed the option of keeping rates unchanged today and voted 5-2 in favor of a hike. It was the first time they haven’t reached a consensus.
The case for a pause was to allow time to assess the impact from tightening prior to today, the record said. The arguments for a hike gave the committee more confidence that inflation would continue to slow, Governor Adrian Orr told a news conference.
“All of the committee were comfortable with the forward path that had interest rates holding around 5.5%,” he said. “So even those who were thinking let’s hold, there was still that tightening bias. What tipped the balance is really about the committee as a group getting the core confidence that we have got on top of inflation.”
What Bloomberg Economics Says…
“Lower-than-expected inflation and cooling growth are key drivers of the pause. We think the RBNZ will start cutting rates later this year as the economic fallout from its tightening emerges”
—James McIntyre, economist.
To read the full note, click here
The RBNZ noted the surge in immigration, but said it expects the pace of arrivals to ease over coming quarters. Its new forecast shows annual immigration peaking at more than 75,000 and dropping to about 40,000 in late 2025.
The RBNZ also downplayed concerns about fiscal policy boosting demand, including reconstruction on the North Island from damage caused by a cyclone.
“The RBNZ no longer seems to believe that a marked economic slowdown is necessary in order to get inflation down,” said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland. “If a relatively modest slowdown of that ilk is enough to bring inflation sustainably lower, that’s a great outcome, relatively speaking.”
–With assistance from Matthew Burgess and Swati Pandey.
(Adds comments from Governor Orr in 10th paragraph)
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