RBNZ holds OCR at 5.5%; no cuts until mid-2025

The Reserve Bank left its official cash rate (OCR) unchanged at 5.5% but said it has a limited “ability to tolerate upside inflation surprises.”

However, the central bank mostly lowered its OCR forecasts, particularly the current quarter, June, September and December quarter forecasts by a notch, making a further hike less likely.

Going into the monetary policy statement, financial markets had priced in a 20% chance of a hike today after economists at New Zealand's largest bank, ANZ Bank NZ, forecast a hike to 5.75%.

Almost all other economists had said another hike wasn't warranted.

The monetary policy committee said it “remains confident that the current level of the OCR is restricting demand.

“However, a sustained decline in capacity pressures in the NZ economy is required to ensure that headline inflation returns to the 1% to 3% target. The OCR needs to remain at a restrictive level for a sustained period of time to ensure this occurs.”

RBNZ is signaling the OCR is likely to remain at 5.5% through to at least the June quarter of 2025.

The central bank is now forecasting 3.8% inflation for the year ending March, down from its 4.3% forecast in November last year, falling to 3.2% for the year ending June and then to 2.6% by the year ending September.

That will bring inflation back within the RBNZ's 1% to 3% target, although it doesn't expect it will fall to the mid-point of 2% until the December quarter of 2025.

RBNZ is now forecasting that the OCR will be at 5.6% from the June quarter through to the end of this year, down from its forecast last November of 5.7%

It has the OCR at 5.5% in the March quarter of 2025, down from 5.6% previously, falling to 5.3% in the June quarter 2025, down from 5.4%, and then to 5.2% in the September quarter 2025, unchanged from November.

That suggests the earliest possible cut in the OCR would be in the June 2025 quarter, but more likely in the September 2025 quarter.

But its forecast of 4.9% by the December 2025 quarter suggests a second OCR cut by the end of 2025.

The forecasts have the OCR dropping to 3.5% by the December quarter of 2026 and to 3.2% in the first quarter of 2027.

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