New Zealand Softens Threat of Rate Hike, Sending Currency Lower

February 28, 2024

3 minutes read

(Bloomberg) — New Zealand’s central bank kept interest rates unchanged and softened its threat of a hike amid signs inflation pressures are waning. The local dollar fell.

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The Reserve Bank’s Monetary Policy Committee held the Official Cash Rate at 5.5% Wednesday in Wellington, as expected by 22 of 24 economists surveyed by Bloomberg. The bank’s new forecasts show less chance of a rate increase this year but no reductions until 2025.

“Core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced,” the RBNZ said. Still, “the OCR needs to remain at a restrictive level for a sustained period of time” to ensure inflation returns to target, it said.

The tone was less hawkish than expected and prompted investors to start betting on rate cuts starting as soon as August. The RBNZ remains reluctant to entertain a pivot to monetary easing because New Zealand’s inflation rate of 4.7% is well above its 2% goal and higher than many of its peers.

The New Zealand dollar dropped as much as 1.1% after the decision. The kiwi bought 61.05 US cents at 4:40 p.m. in Wellington from 61.74 cents beforehand. Bond yields and swap rates fell as investors reduced bets on a rate hike and priced in two cuts by the end of the year.

Rate Cuts

“We continue to expect the RBNZ will cut the OCR in November, with the risks to that view appearing more balanced now that the RBNZ has signaled some degree of comfort with very conflicting signals in the key data out over the recent months,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “We think over coming months the hurdle for an OCR move in either direction remains high.”

Policymakers globally have been pushing back against bets that rate cuts are imminent, saying they need to first be sure inflation is tamed.

The Reserve Bank of Australia has said it is not possible to rule out further rate increases, while US Federal Reserve officials have indicated they are in no rush to begin lowering their benchmark. Only one of the nine-member Bank of England monetary policy committee is currently pushing for cuts.

RBNZ Governor Adrian Orr cautioned that rates globally may need to stay at restrictive levels longer than markets are currently expecting.

“As soon as people think that you might have done enough, the next guessing game is when are you going to start cutting,” Orr told reporters. “Central banks have a job to do, they are focused on that job and the policy rates won’t be moving until the high level of confidence on inflation” is achieved, he said.

New Forecasts

The RBNZ’s updated forecasts show the average OCR peaking at 5.60% this year compared to 5.69% in its previous projections. That implies a 40% risk of a hike. The forecasts suggest rate cuts starting in the first half of 2025.

Most economists think the OCR has peaked for this cycle and that the next move will be a cut. Still, there is a wide range of views on the timing, from as soon as May this year to as late as mid-2025.

ANZ Bank and TD Securities were tipping a quarter-point hike to 5.75% today, and a follow-up increase in the second quarter that would take the OCR to a peak of 6%.

“We got this one totally wrong,” said Sharon Zollner, chief New Zealand economist at ANZ in Auckland. “We continue to think there’s a high chance that the data will demonstrate that 5.5% is not sufficiently high to return inflation to target in an acceptable time frame.”

What Bloomberg Economics Says…

“Data over coming months will be sufficiently weak for the central bank to pivot away from the rate-hold it’s now forecasting to last until the first quarter next year. Easing inflation and weaker growth could prompt the RBNZ to cut rates as soon as 1H24.”

— James McIntyre, economist

To read the full note, click here

The RBNZ’s fresh economic projections show it still expects inflation to fall into its 1-3% target band by the third quarter of 2024.

“Heightened geopolitical and climate conditions remain a risk for inflation,” it said. “The recent rise in global shipping costs is one manifestation of these risks. The Committee remains alert to these relative cost pressures and will act to limit spillovers into general inflation if necessary.”

The central bank expects the economy to grow modestly this year and avoid slipping into recession, buoyed by record immigration. New Zealand posted its biggest calendar-year jump in population since the end of World War Two in 2023.

“Recent high population growth is supporting aggregate spending, as evident in upward pressure on dwelling rents,” the RBNZ said.