New Zealand Central Bank Holds Rates, Strikes More Balanced Tone on Economic Risks

By James Glynn

SYDNEY--The Reserve Bank of New Zealand held its official cash rate steady at 5.50% on Wednesday, staying in what central bank Governor Adrian Orr likes to call watch-worry-and-wait mode.

Still, the RBNZ's cautious narrative softened somewhat amid an admission that inflation pressures are starting to ease.

"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 central bank said in a statement.

"Some domestically generated price pressures remain strong. But there are signs inflation persistence will ease in line with the fall in capacity pressures and business pricing intentions," it added.

"The committee agreed that 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," the RBNZ said.

Chief economist at ANZ NZ Sharon Zollner said the central bank has delivered a more balanced statement, making it clear that it is more attuned to weakness in the economy, while acknowledging downside risks.

Zollner is currently expecting a rate cut in February next year.

New Zealand's economy has been drifting in and out of recession over recent years, and unemployment has been rising.

Despite this, the RBNZ, which was one of the first major central banks to begin raising interest rates as inflation soared globally toward the end of the Covid-19 pandemic, has retained a laser-like focus on quashing inflation.

Inflation data for the second quarter next week could be the trigger for change in the outlook.

Some economists are already expecting interest rates to start falling before the end of the year, a move that would sync the New Zealand central bank up with global peers that have already started easing the policy reins.

At its last policy meeting in May, the RBNZ delivered a hawkish surprise to financial markets, signaling that interest rates might need to remain restrictive for longer than expected due to stubborn inflation.

The RBNZ's current forecast plot for the OCR, which will be updated in August, implies that a cut is not likely before August 2025.

UBS anticipates that the central bank will cut the official cash rate in November this year by 25 basis points, with a cumulative easing cycle of 225 basis points by the end of 2025 to follow.

UBS economist Nic Guesnon expects the RBNZ will likely lower its inflation outlook at its next monetary policy meeting in August, paving the way for the start of cuts.

Write to James Glynn at [e-mail]

(END) Dow Jones Newswires

07-09-24 2244ET