The Reserve Bank of New Zealand (RBNZ) opted to keep its cash rate unchanged at 5.5% on Wednesday, aligning with market expectations. However, the central bank’s accompanying statement signaled a potential shift towards less restrictive monetary policy if inflationary pressures abate as anticipated.
In its latest policy announcement, the RBNZ emphasized the necessity for ongoing monetary restraint while acknowledging a gradual easing of this stance over time. This stance marks a departure from its previous assertion in May, where it had projected sustained policy tightness and hinted at potential rate hikes in the absence of controlled inflation.
Following the announcement, the New Zealand dollar depreciated by 0.74% against the US dollar to $0.6085, reflecting market expectations of an earlier initiation of rate cuts. Concurrently, two-year swap rates dropped to a six-month low of 4.6850%, implying a market consensus of 25 basis points of rate cuts by October.
“The RBNZ’s commentary today was notably dovish,” remarked Abhijit Surya, economist specializing in Australia and New Zealand at Capital Economics. “This reinforces our view that the central bank is likely to commence its easing cycle starting November.”
The central bank also revised its inflation outlook, attributing significant moderation in consumer price pressures to its monetary policy actions. It anticipates headline inflation to re-enter the 1% to 3% target range in the latter half of this year, down from the elevated 4% observed in the first quarter.
While acknowledging persistent domestic price pressures, the RBNZ noted indications of easing inflation persistence as capacity constraints and business pricing intentions diminish.
The RBNZ, which has aggressively tightened policy by 525 basis points since October 2021 in an effort to combat inflation, has significantly slowed the pace of economic growth. Recent data indicated a marginal 0.2% expansion in the first quarter of 2024, signaling New Zealand’s emergence from a technical recession.
The central bank refrained from providing updated economic indicators or a forecast for the official cash rate track in its Monetary Policy Review, underscoring its cautious approach amid evolving economic conditions.
