Reserve Bank holds OCR at 5.5% once again

5 days ago
OCR

The official cash rate has been held at 5.5% for the eighth consecutive time.

Last hiked in May 2023, the OCR is used as a tool by the Reserve Bank of New Zealand to get inflation into the target range of 1-3%.

RBNZ said in today's statement they expect inflation to drop within the target range later this year.

At the beginning of 2023, inflation was measured at 6.7%. Since then, it has reduced every quarter and now sits at 4%.

As inflation continues to track down toward the target range, the move to hold the OCR at its current setting was widely predicted by economists.

As inflation continues to track down toward the target range, the move to hold the OCR at its current setting was widely predicted by economists.

The RBNZ committee agreed the monetary policy will need to remain restrictive.

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

Uncertainty around how tax cuts will impact spending

RBNZ said they are "less certain" on how the government's pending tax cuts, to begin at the end of the month, will impact private spending.

However, RBNZ added the current and expected government spending will “restrain overall spending” in the economy.

Labour market pressures ‘have eased’

RBNZ said the decline in inflation reflects receding domestic pricing pressures, as well as lower inflation for goods and services imported into New Zealand.

“Labour market pressures have eased, reflecting cautious hiring decisions by firms and an increased supply of labour.

“The level of economic activity, including business and consumer investment spending and investment intentions, is consistent with the restrictive monetary stance.”

Non-tradeable inflation a concern

Yesterday, AAP reported that while the inflation reduction represents a positive change, the non-tradeable component is concerning economists.

Non-tradeable inflation is defined by the RBNZ as goods and services which do not face foreign competition, such as government charges. It shows how domestic demand and supply conditions affect consumer prices.

In the March quarter of 2024, non-tradeable inflation was measured at 5.8%, and 5.9% in the quarter of December 2023, and was at 6.3% in the quarter prior.

This more stubborn inflation means the RBNZ will likely not cut the OCR for some time.

ANZ and Westpac both forecast a downward change in the OCR in early 2025, while RBNZ internal tracking predicted it won’t go down until the second half of 2025.

Last week ASB revised its forecast for downward movement in the OCR from February 2025 to November this year.

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