Following its October meeting, the Reserve Bank of New Zealand (RBNZ) again left the interest rate at 5.5%, as expected, while stating that the current rate level is constraining economic activity and reducing inflationary pressure as required. The RBNZ has raised rates by 5.25% since October 2021, which was the most aggressive tightening since the official cash rate was introduced in 1999.
Meanwhile, the RBNZ warned that interest rates will have to remain at a high level for the foreseeable future in order to guarantee the return of consumer inflation to the target range (1%-3%) and maintain maximum sustainable employment. The RBNZ expects inflation to return to the target range by the second half of 2024.
"As monetary conditions remain restrictive, a further slowdown in spending growth is expected," the RBNZ said, warning that in the short term, activity and inflation may not slow down as much as necessary. The RBNZ cited several risks, including oil prices, that could lift domestic spending in the coming months and cause headline inflation to be higher than expected.
New Zealand's GDP growth exceeded forecasts in the 2nd quarter, which increased the risk that the RBNZ will again believe that the economy is working at full capacity again. Meanwhile, consumer inflation slowed to 6% in the second quarter, the lowest since the fourth quarter of 2021 and compared to 6.7% in the previous period. Still, the prices remained at the levels not seen since the 1990s.