The Reserve Bank of New Zealand (RBNZ) has kept the cash rate at 5.5% on the back of balanced inflation. This came as a somewhat welcome surprise to investors as the RBNZ had issued limited communications since November 2023.
RBNZ monetary policy decision surprises markets
Although aligned with market forecasts, some predicted interest rate hikes. Adrian Orr, the governor of the RBNZ, commented that it is important to manage constant inflation pressures to achieve the 2% inflation target in the local economy.
This more dovish outlook instigated a rally in bonds and a selloff in the New Zealand dollar. By decreasing the cash rate peak, the bank stemmed fears of further increases. In its statement, the RBNZ did, however, indicate that as headline inflation still sits between 1% and 3%, it could not lower interest rates.
It also said:
Heightened geopolitical and climate conditions remain a risk for inflation. The recent rise in global shipping costs is one manifestation of these risks. The Committee remains alert to these relative cost pressures and will act to limit spillovers into general inflation if necessary.
Reuters indicated that 23% of the market expected an RBNZ rate increase. After this announcement, the forecasts for interest rate hikes dropped. The New Zealand dollar closed Friday, 1 March 2024 trading down at $0.61.
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Economists reportedly believe that the tone of the statement lacked a hawkish edge. The RBNZ has struggled to control inflation since the pandemic. Based on Reuters data, since October 2021, the bank hiked rates by 525 basis points.
