WELLINGTON: New Zealand’s central bank held interest rates at the lowest level in 3-1/2 years and expects them to remain there for a period while the economy regathers momentum.
The Reserve Bank’s (RBNZ) Monetary Policy Committee (MPC) kept the official cash rate (OCR) at 2.25% yesterday in Wellington, as expected by all 22 economists surveyed by Bloomberg.
The RBNZ’s new forecasts indicate some chance of a quarter-point hike later this year.
“If the economy evolves as expected, monetary policy is likely to remain accommodative for some time,” the RBNZ said in its post-meeting statement.
“The committee will continue to assess incoming data carefully. As the recovery strengthens and inflation falls sustainably toward the target midpoint, monetary policy settings will gradually normalise.”
The currency slid as much as 0.6% to 60.12 US cents while the yield on policy-sensitive two-year notes extended an earlier decline as traders pared expectations on RBNZ rate hikes.
Markets priced a roughly three-in-four chance of a hike by October shortly after the decision, down from 90% prior.
With the economy recovering and inflation holding above the RBNZ’s 1% to 3% target, policymakers remain cautious about how soon to begin unwinding monetary stimulus.
That sentiment contrasts with investors, who are pricing at least one rate hike in the fourth quarter, and some economists, who anticipate tightening as soon as September.
Governor Anna Breman, who led the deliberations for the first time since taking the RBNZ’s helm in early December.
The MPC agreed by consensus to hold rates, according to the record of meeting also published yesterday.
“The committee agreed that the economic recovery remains nascent, and a premature normalisation of monetary conditions could dampen the recovery and lead inflation to undershoot the target,” the RBNZ said.
“The committee also considered the risk that policy remains accommodative for too long, leading inflation to persist above the mid-point of the target range for longer.”
The RBNZ’s forward guidance shows the average OCR rising to 2.38% by the end of the year, compared with 2.28% projected in the previous outlook published in November. That implies a 50% chance of a rate hike.
It forecasts the average OCR will be 2.62% by mid-2027.
Under Breman’s predecessors, the RBNZ executed an aggressive 15-month easing cycle from August 2024 that reduced the cash rate by 3.25 percentage points.
New Zealand’s pause comes at a time when global central banks are divided on policy as they grapple with disparate economic and inflation cycles.
The Reserve Bank of Australia has been forced to reverse course and resume hiking rates to tackle resurgent price pressure while traders are sticking with bets for the US Federal Reserve to cut borrowing costs at least twice this year.
Market pricing for US rates has helped drive the greenback lower.
The RBNZ’s decision yesterday trimmed the Kiwi’s more than 6% rally against the US dollar in the past three months.
New Zealand inflation picked up to 3.1% in the fourth quarter after the economy expanded 1.1% in the three months through September, suggesting a recovery is now well under way.
The RBNZ projected inflation will slow to 2.3% by the end of 2026, which is modestly higher than the 2.2% previously predicted.
It expects inflation will reach the 2% target midpoint by the second quarter of 2027.
Committee members “noted the risk of inflation remaining more persistent, given surveys showing somewhat elevated inflation expectations and business pricing intentions,” the RBNZ said.
“One member supported maintaining the OCR at current levels for now but noted that if economic activity recovers as expected, monetary stimulus could begin to be withdrawn somewhat earlier without compromising the economic recovery.” — Bloomberg
