The RBNZ lowered its forecast cash rate peak to 5.6% from a previous projection of 5.7% and continues to foresee a cut until mid-2025. — Reuters
WELLINGTON: New Zealand’s central bank is holding the cash rate steady at 5.5% and trimming the forecast peak for rates, catching markets by surprise as policymakers say the risks to the inflation outlook have become more balanced.
The decision on Wednesday was in line with expectations from 28 economists in a Reuters poll with all but one forecasting the Reserve Bank of New Zealand (RBNZ) would leave the cash rate at a 15-year high for the fourth consecutive meeting.
However, the central bank’s rate forecast track signalled a slightly more dovish outlook than some traders had anticipated, triggering a sell-off in the New Zealand dollar and a rally in bonds.
The RBNZ lowered its forecast cash rate peak to 5.6% from a previous projection of 5.7% – effectively reducing the risk of further tightening – and continues to foresee a cut until mid-2025.
“Core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced,” the RBNZ statement said.
The market had priced in around a 23% chance of a hike this week. The probability of a move by May more than halved to just 20%, from 47% before the announcement, while two-year swap rates dived to 5.035%, from 5.195% and the kiwi dollar was down almost 0.8% at US$0.6122, breaking support around US$0.6152.
ASB chief economist Nick Tuffley said that the tone of the statement was not as hawkish as could have been, with the risks now seen as more balanced as opposed to the upward skew noted in November’s statement.
“We think over coming months the hurdle for an official cash rate move in either direction remains high,” he said.
New Zealand’s annual inflation has come off in recent months and is currently running at 4.7% with expectations that it will return to its target band of 1% to 3% in the second half of this year.
“Members agreed they remain confident that monetary policy is restricting demand.
A further decline in capacity pressure is expected, supporting a continued decline in inflation,” the central bank’s minutes, which accompanied the policy statement, said.
A front-runner in withdrawing pandemic-era stimulus among its peers, the RBNZ has battled to curb inflation, lifting rates by 525 basis points since October 2021 in the most aggressive tightening since the official cash rate was introduced in 1999.
The rate hikes have sharply slowed the economy with recent data showing that it was tracking below previous central bank expectations.
However, the unemployment rate in the fourth quarter of 2023 was slightly better at 4%, compared with an expected 4.2% rate. — Reuters
