NZ: RBNZ Announcement

The Reserve Bank of New Zealand's Monetary Policy Committee has left the official cash rate unchanged at 5.50 percent, in line with the consensus forecast. Prior to today's meeting, officials had increased policy rates for twelve consecutive meetings since October 2021 by a cumulative 525 basis points as part of efforts to return inflation to their target range of 1.0 percent to 3.0 percent.

Headline CPI inflation fell to 6.7 percent in the three months to March from 7.2 percent in the three months to December, with core inflation easing slightly from 7.4 percent to 7.3 percent. The statement accompanying today's decision notes that officials expect inflation will continue to decline, reflecting signs that labour market tightness is easing. Officials forecast inflation will return to the target range in the second half of 2024.

The statement also notes that previous policy tightening is continuing to weigh on consumer spending and residential construction, with businesses also reporting weaker demand and investment plans. New Zealand's GDP contracted in the three months to March, partly reflecting disruption caused by extreme weather events, and officials noted that recent indicators suggest that weakness in economic activity will persist in the near term.

With officials expecting weak growth and further declines in inflation, today's decision to leave rates on hold suggests they are now more confident that policy is sufficiently restrictive to return inflation to their target range. Officials also noted that the effects of previous policy tightening are still passing through to households. They concluded, however, that policy will need to remain restrictive"for the foreseeable future".

The Reserve Bank of New Zealand was split between no change at the May meeting or the 25-basis-point hike that was voted for, a smaller hike than a prior run of 50 and even 75 point moves. Though inflation remains stubbornly high, at 6.7 percent in the latest update which is for the first quarter, GDP has been slipping, down 0.1 percent and down 0.7 percent on a quarter-over-quarter basis in the first and fourth quarters.

Meeting at roughly six week intervals, the Reserve Bank of New Zealand meets and decides whether to change or maintain New Zealand's Official Cash Rate. The RBNZ is known for its clarity regarding monetary policy intentions, thus the result is usually foreseen in advance. The decision aligns with the Reserve Bank of New Zealand's monetary policy to spur or slow economic growth or affect the exchange rate.

The RBNZ maintains an inflationary target range of 1 percent to 3 percent and will change rates to keep it within such a range, making rate decisions fairly predictable. Rate changes are significant nonetheless, affecting interest rates in consumer loans, mortgages, and bond rates. Increases or even expectations for rate increases tend to cause the New Zealand Dollar to appreciate, while rate decreases cause the currency to depreciate.

The RBNZ determines interest rate policy at it policy meetings. These meetings occur roughly every six weeks and are one of the most influential events for the markets. Market participants speculate about the possibility of an interest rate change. However, since the Bank is known for its clarity in setting policy, the result is usually built into the markets in advance. The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the financial markets, while lower interest rates are bullish.

Frequency
Eight times a year.