MNI RBNZ WATCH: OCR Likely To Hold At 5.5% After May Steer

The Reserve Bank of New Zealand is set to keep its Official Cash Rate on hold at 5.5% at its July 12 meeting, as inflation and the country’s economy continues to slow.

The RBNZ has hiked rates continuously since August 2022, however, the May Monetary Policy Statement noted the OCR had likely peaked when it last decided to increase rates 25bp on 24 May and the economic landscape has only helped solidify that view since (see: MNI BRIEF: RBNZ Hikes OCR To 5.5% "Peak," Rates Restrictive).

Any change in monetary policy next week would represent a severe market shock, with the overnight index swap market pricing in a 14% chance of a hike late last week and financial market analysts unanimously looking for no change. However, the market does not believe the RBNZ is done, with a peak of 5.75% now priced in by November -- lower than the 6% by October priced in before May’s meeting (see: MNI RBNZ WATCH: Hike Expected as Key Inflation Inputs Sticky).

RESTRICTIVE RATES

The Reserve believes monetary policy settings are restrictive and slowing the economy as intended. The New Zealand economy has illustrated the restrictive nature of the OCR following May’s call, with Q1 GDP falling 0.1%, following the 0.7% decline over Q4 2022, pulling the country into a technical recession (see chart).

While significant inflation measures have not printed since the RBNZ’s last decision, a raft of price indexes and surveys have painted a more downbeat picture. Stats NZ data showed food prices rising at their slowest pace since April 2022 at 0.3% in May, while rental-price increases also fell. July’s NZIER Quarterly Survey of Business Opinion also showed a dip in businesses sentiment over the June quarter, with confidence at its weakest level since March 2020.

While Stats NZ has also not updated the unemployment rate, it published employment indicators for May which showed early signs of moderation within the labour market, with all industries recording a 0.2% uptick in filled jobs over the month, down from April’s 0.5% (see chart).

HIGHER FOR LONGER

The RBNZ believes its job finished, however, RBNZ Chief Economist Paul Conway told MNI after May’s meeting that rates would likely need to stay elevated at 5.5% until about mid-2024 to pull inflation back to the central bank’s 1-3% target.

However, ex-staffers have warned rates may need to fall faster than anticipated as banks suffer higher costs of funds. But further increases by the U.S. Federal Reserve – minutes released this week raised the possibility of further rate hikes – could add pressure on the RBNZ to continue hiking should inflation and employment print stronger then expected when Stats NZ updates its data after this week’s meeting.