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.
Abhijit Surya, economist at Capital Economics, said the RBNZ is now in the process of shifting toward a more dovish narrative.
The RBNZ's messaging gives greater confidence that it will start its easing cycle in November, he said, adding that there were a few "nuggets" in the policy announcement that show the central bank is now one step closer to cutting rates.
The RBNZ noted that restrictive monetary policy has "significantly" reduced consumer price inflation, whereas in May it only said that policy has reduced capacity pressures in the New Zealand economy and lowered consumer price inflation, he said.
The central bank is also no longer saying that interest rates need to remain restrictive for a sustained period, he added
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 official cash rate, which will be updated in August, implies that a cut is not likely before August 2025.
Write to James Glynn at james.glynn@wsj.com
(END) Dow Jones Newswires
07-09-24 2318ET
