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OCR - Figure 1
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The Reserve Bank has hinted interest rate cuts may be closer than previously thought.

The central bank held the official cash rate steady for an eighth consecutive meeting at 5.5 percent, as expected.

It repeated much of previous statements about the slowing economy, easing labour market, and gradually falling inflation.

"Restrictive monetary policy has significantly reduced consumer price inflation, with the Committee expecting headline inflation to return to within the 1 to 3 percent target range in the second half of this year," the Monetary Policy Committee (MPC) said in a statement.

But in an easing of attitude the MPC statement replaced the standard phrase of the OCR needing "to stay higher for longer" with the OCR needing to "stay restrictive".

"The extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures."

OCR - Figure 2
Photo RNZ

This review was not accompanied by economic and financial forecasts, but in the May monetary policy statement it had indicated the OCR would stay at its current level until the second half of 2025.

Over the next few weeks, there will be updated inflation and labour market data adding fresh input for the RBNZ's August monetary policy statement.

Turning point

The tone of the RBNZ statement and accompanying minutes of the committee's meeting were taken as dovish and pointing to sooner than expected rate cuts, after May's statement had flirted with talk of rate rises.

The New Zealand dollar fell markedly against most major currencies, and local wholesale interest rates were lower.

ASB chief economist Nick Tuffley said the statement was decidedly dovish compared to the one issued in May, and showed the RBNZ would be watching the economic numbers closely.

"We continue to expect the RBNZ will cut the OCR by 25 basis points in November. However, the risks are a sooner cut or bigger cut should the signs point to inflation undershooting the RBNZ's view."

OCR - Figure 3
Photo RNZ

Financial markets changed to price in a definite prospect of a 25 basis point cut to 5.25 percent in October, and most likely another in November.

The MPC minutes showed discussion on the big impact of the high cash rate policy as it looked at sliding consumer and business surveys, rising business failures, weak retail sales, and subdued bank lending.

"This may indicate that tight monetary policy is feeding through to domestic demand more strongly than expected."

Some economists have been critical of the RBNZ's hardline policy stance and suggested it ran the risk of damaging the economy.

The MPC said government spending cuts were feeding through slowly, but the impact of tax cuts, due to come in at the end of the month, was uncertain.

CoreLogic senior property economist Kelvin Davidson said the latest decision offered little for the housing market in the short term.

"However, there could now just be some light emerging at the end of the mortgage rate tunnel, and although they might not necessarily fall straight away or particularly quickly, any drops would no doubt be welcomed by borrowers.

"To be fair, there's already been a drift lower for rates in the past few months, but OCR cuts would clearly add some impetus."

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