WELLINGTON: New Zealand’s central bank holds rates steady, but a split vote underscores a knife-edge decision, as policymakers warn rates will need to rise sooner and by more than expected to counter an energy shock rippling through the global economy.
Wrapping up the May policy meeting yesterday, the Reserve Bank of New Zealand (RBNZ) kept the cash rate on hold at 2.25%, and said three members voted to raise interest rates by a quarter-point while three voted to leave rates steady. Its governor Anna Breman had the ultimate deciding vote.
“On balance, the official cash rate will most likely need to increase sooner and by more than envisaged in the February Monetary Policy Statement,” the RBNZ said in its statement.
“The pace of official cash rate increases will depend on the relative influence of persistent wage and price-setting behaviour versus weaker economic activity on medium-term inflation pressures.”
Markets narrowed the odds of a first rate hike in July to 72% from 68% before.
The revised forecast for the cash rate now implies at least two more rate hikes by the end of the year
All but one of 29 economists polled by Reuters expected a steady decision for the third straight meeting, while over half of them warned the prolonged Middle East conflict could force a rate hike by September.
The RBNZ has slashed rates by 325 basis points since August 2024, reversing its post-pandemic tightening drive that pushed the economy into recession and cooled inflation.
That calculus is now shifting, with inflation running at 3.1% for two straight quarters, sitting above the central bank’s target range of 1% to 3%.
There are signs that near-term inflation expectations are starting to shift as war-driven disruptions to global oil supply dragged on.
Central banks globally have also turned hawkish – the US Federal Reserve is now seen tightening rather than easing policy this year, while Australia’s central bank has hiked rates three times already.
A fragile weeks-long Middle East ceasefire has been tested this week with US attacks on Iranian targets.
The Strait of Hormuz, which carries 20% of the world’s oil and gas shipments, has been effectively shut by Tehran since the war erupted late in February.
The RBNZ now expects inflation to rise to 4.3% in the September quarter, and unemployment, which hovered near a decade high at 5.3%, to peak at 5.4% and stay there until June 2027. — Reuters
