Key Facts

  • The Reserve Bank of New Zealand (RBNZ) has left the official cash rate unchanged at 5.5 per cent.
  • Inflation remains high, prompting the RBNZ to maintain a restrictive monetary policy.
  • The central bank’s forecast does not predict rate cuts until mid-2025, contradicting market expectations of cuts from May 2024.
  • The Kiwi dollar appreciated following the revelation that rates could stay higher for longer.
  • Current inflation, for the 12 months to September, stands at 5.6 per cent.
  • The RBNZ’s new forecasts predict inflation falling back to the 1-3 per cent target band by September 2024.
  • Net immigration higher than anticipated has increased the labour market supply but also demand side effects.
  • Housing rents have increased due to robust population growth, directly affecting inflation. House prices have steadied after initial drops.
  • The RBNZ is expected to hold firm on monetary policy, despite market feelings about inflation.

Article Summary

The Reserve Bank of New Zealand (RBNZ) has maintained the official cash rate at 5.5%. This decision is reflective of the current high inflation levels and the subsequent necessity for a restrictive monetary policy. As per the central bank’s forecasts, no rate cuts can be anticipated until mid-2025, contrasting market expectations that had expected cuts from May 2024. The confirmation of potentially longer-term high rates resulted in the kiwi dollar gaining about half a US cent.

The 12-month inflation rate up to September stands at 5.6%, and the central bank does not see this rate returning to the targeted band of 1 to 3% until September 2024. However, the market was taken by surprise with the more hawkish than expected stance from RBNZ which has reinforced the possibility of a rate hike next year.

The RBNZ’s Monetary Policy Committee acknowledged the greater than predicted net immigration, leading to an increased supply and demand in the labour market. Concomitantly, strong population growth has led to a rise in housing rents, which contributes to inflation directly. While house prices have stabilised after an initial decline, rent increases and any hike in construction costs in response to escalating housing needs are indexed in the Consumer Price Index, affecting inflation.

Despite market sentiment leaning towards inflation easing, RBNZ Governor Adrian Orr is expected to maintain a stringent stance on the inflation fight. With the possibility of a further rate hike, economists predict a possible increase to 5.75% in February. The central bank’s decisions and forecasts suggest a commitment to returning inflation to its target while supporting maximum sustainable employment.

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