New Zealand may have changed governments, but the country’s Reserve Bank hasn’t altered its monetary policy stance, keeping the official cash rate (OCR) steady at 5.5% on Wednesday.
The central bank acknowledged that the current high cash rate and policy stance are restricting consumer spending and pushing inflation lower. However, it warned that any signs of inflationary pressures re-emerging could lead to further tightening with another cash rate increase.
This policy stance aligns with the approach of the Reserve Bank under its new governor, Michelle Bullock.
The RBNZ stated, “The Monetary Policy Committee is confident that the current OCR level is restricting demand. However, ongoing excess demand and inflationary pressures are of concern, given the elevated level of core inflation. If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further.”
The RBNZ emphasized that interest rates must remain at a restrictive level for an extended period to bring consumer price inflation back to target and support maximum sustainable employment.
“While interest rates are restricting spending in the economy and consumer price inflation is declining, as necessary to meet the Committee’s Remit, inflation remains too high, and the Committee remains wary of ongoing inflationary pressures,” the RBNZ added.
Internationally, economic growth has outperformed expectations but remains below trend and is expected to slow further, affecting New Zealand’s export revenues.
In New Zealand, demand growth has eased, albeit less than anticipated in the first half of 2023, partially due to strong population growth. The OCR will need to remain restrictive to keep demand growth subdued and return inflation to the 1 to 3 percent target range.
Wage growth has also eased from recent peaks, and demand for labor is softening, with job advertisements now below pre-COVID-19 levels. However, strong inward migration is increasing the population and adding to the labor supply.
“While population growth has eased supply constraints, the effects on aggregate demand are becoming apparent. This is increasing the risk of inflation remaining above target,” the statement concluded.