The Reserve Bank of New Zealand (RBNZ) announced on Wednesday that it has decided to keep the official cash rate at 5.5%, in line with economists’ forecasts. However, the central bank indicated that it could consider making monetary policy more accommodative in the future if inflation eases as expected.
In a shift from its previous stance, the RBNZ report indicated that monetary policy would need to be tighter to manage inflation, indicating that the level of tightening could be eased over time to reduce inflation.
This is a marked shift from the May meeting, in which the central bank suggested that policy would remain tight for a longer period of time and that a rate hike could not be ruled out if inflationary pressures persisted.
Following the announcement, the New Zealand dollar retreated, falling 0.74% to $0.6085, a 16-month low against the Australian dollar. Elsewhere, two-year swap rates fell 11 basis points to a six-month low of 4.6850%, suggesting the market is pricing in a 25 basis point rate cut in early October.
The central bank also changed its narrative on inflation, now believing that monetary policy has “significantly” reduced consumer price inflation. The RBNZ expects rates to return to the 1% to 3% target range in the second half of the year, up from 4% in the first quarter.
Although some domestic price pressures remain strong, the RBNZ noted signs that inflationary stability is expected to ease.
It raised rates by 525 basis points from October 2021, marking the most intense tightening since the introduction of official interest rates in 1999.
These rate hikes have slowed New Zealand’s economy significantly, but the latest data shows the country has emerged from a technical recession in the first quarter of 2024, recording 0.2% growth.
Reuters contributed to this article.
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