Dovish but bold stance from RBNZ

A109 Light Utility Helicopter flight with mayor Gisborne City from the air in November 2023.

The Reserve Bank expects to keep the Official Cash Rate on hold now at 5.5 percent for a year, confident that inflation is easing back from its peak and on the expectation that a surge in immigration will “ease back towards pre-Covid-19 trend levels over coming quarters”.

It was a major surprise for markets that had begun expecting the OCR might need to go as high as 6 percent based on a more expansionary 2023 Budget than had been anticipated, the inflationary impact of cyclone rebuilding work and news earlier this month that the country had 161,900 migrant arrivals in the year to March, for a net gain after departures of 65,400.

The NZ dollar quickly dropped three-quarters of a US cent and wholesale interest rates fell sharply on the dovish stance from the country’s central bank.

It was all good news for a Government which had been heavily criticised in some quarters, and by the Opposition of course, for hiking its spending plans for next year by almost $9bn more than it had expected to five months earlier.

It is also good news for borrowers as it should put downward pressure on fixed mortgage rates . . . and us all, if the bank’s view proves correct that it doesn’t need to “squeeze” the economy any more tightly.

The big question will be whether the Monetary Policy Committee has got it right in their majority view that an OCR of 5.5 percent is all that’s needed now to bring inflation rates that we haven’t seen in three decades under control.

Inflation of 7.2 percent over 2022 had slowed to an annual rate of 6.7 percent by the end of March.

RBNZ Governor Adrian Orr said “core inflation pressures” would remain until capacity constraints in the economy eased further. He noted that while strong immigration would help address labour shortages, its net impact on overall spending was “uncertain”.

Unlike the Treasury, the Reserve Bank still expects a technical recession this year but only just — forecasting a 0.2 percent fall in GDP in the three months to June and a 0.1 percent reduction in the September quarter. It sees annual inflation dropping back to 4.9 percent by the end of this year, and back within its target range below 3 percent by September next year.

Interestingly, two of the seven-member committee advised the OCR be kept on hold at 5.25 percent.

Having faced a lot of criticism for leaving monetary policy too loose for too long, stoking inflation, the Reserve Bank governance team put their reputations on the line yesterday with their dovish but bold stance and commentary.