RBNZ dashes hope of 2024 interest rate cut

The Reserve Bank left its official cash rate (OCR) unchanged at 5.5% and said “ a prolonged period of subdued activity is required to reduce inflationary pressure.”

The OCR has been at its current level since May and has been raised from 0.25% since October 2021.

The central bank raised its forecasts for the OCR from June next year out to December 2026 compared with its previous forecasts in August and indicated its earliest cut in the OCR wouldn't be until the March or June quarters of 2025.

The big debate among economists has been over when the first OCR is likely to be and the RBNZ's forecasts suggest the hawks have won and the hopes of those expecting a cut in 2024 have been dashed.

The hopes of financial market participants were particularly hard hit – as recently as Monday they had priced in an August 2024 cut.

But even the hawks may have to push their forecast first cut out a couple more months – ANZ Bank NZ, for example, had a February 2025 cut pencilled in.

Westpac currency strategist Imre Speizer said the market had been expecting a slightly lower OCR track and so the NZ dollar and wholesale rates rose in response.

“The distant part of the forecast, for 2026, was increased by 50 basis points, reflecting less easing expected over that time horizon,” Speizer said.

RBNZ is forecasting slightly higher inflation in the September 2024 quarter than it was expecting in Auguest but, even so, that's when it expects the Consumers Price Index will at last return to within its 1% to 3% target range, coming in at 2.9%, above the August forecast of 2.7%.

It expects the annual CPI will reach the mid point of the range, 2%, in the September quarter of 2025, unchanged from its August forecast.

ASB chief economist Nick Tuffley said the RBNZ showed more concern about the upside risks to inflation.

“The RBNZ statement hammered home the message that interest rates need to remain high for a sustained period, and with some risk a further OCR increase would be needed if inflation pressures turn out to be persistently stronger than expected,” Tuffley said.

He added that the hurdle for another OCR hike remains high.

“We have stuck with our view that the RBNZ won't cut the OCR until early 2025, but the balance of risks around that view now looks more even than we had been thinking,” he said.

RBNZ said interest rates are constraining economic activity and reducing inflationary pressure as demand in the economy continues to ease.

Notably, the central bank said the monetary policy committee “agreed that the OCR needs to stay at a restrictive level to ensure that annual consumer price inflation returns to the 1% to 3% target range and to support maximum sustainable employment.”

The new government has agreed to remove the employment part of the policy target agreement from RBNZ's mandate.

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