New Zealand's central bank has upheld its benchmark interest rate for the seventh consecutive session and indicated a delay in rate cuts due to the slow decline in services inflation.
The Reserve Bank of New Zealand's (RBNZ) Monetary Policy Committee (MPC), under the leadership of Governor Adrian Orr, decided to maintain the Official Cash Rate at 5.50 percent.
The MPC noted that inflation is anticipated to return to the target range of 1 to 3 percent by the end of 2024, despite the persistent components of domestic services inflation.
“The Committee concurred that monetary policy needs to remain restrictive to ensure inflation returns to target within a reasonable timeframe,” the RBNZ stated.
The central bank highlighted that the welcome decrease in inflation partly stems from lower inflation for goods and services imported into New Zealand. Inflation has notably declined in many advanced economies.
“However, services inflation is receding slowly, and anticipated cuts to policy interest rates are continuously being delayed,” the RBNZ added.
Furthermore, policymakers observed that reduced capacity pressures and a softening labor market are contributing to lower domestic inflation. However, this decline is moderated by sectors that are less responsive to interest rates.
They pointed out that a gradual decrease in domestic inflation poses risks to inflation expectations.
On a global scale, services inflation has eased at a slower pace than anticipated at the beginning of the year. Nevertheless, inflation among New Zealand’s trading partners is expected to continue declining.
However, Abhijit Surya, an economist at Capital Economics, suggested that the RBNZ may be overstating the risks to the inflation outlook. Surya argued that there is a strong case for the bank to ease its policy by the end of the year.
Surya commented that if inflation returns to the target by the third quarter, the bank should consider loosening policy settings by the fourth quarter of this year, despite current indications to the contrary.
