New Zealand Central Bank Maintains Rates

RBNZ keeps rate steady at 5.5%, adopts less hawkish tone, reducing rate hike likelihood. NZD slides sharply, while local stock market shows slight gains.

New Zealand’s central bank has kept interest rates unchanged for a fifth straight meeting, maintaining the cash rate at 5.5%. The rate statement was less hawkish than expected and the New Zealand dollar sharply lower against the US dollar.

The Reserve Bank of New Zealand (RBNZ) held the cash rate at 5.50% at today’s meeting. This was expected but the rate statement and comments from Governor Orr at the follow-up press conference were somewhat surprising as they were less hawkish than recent comments from the RBNZ.

At today’s meeting, the RBNZ expressed satisfaction with the inflation outlook, a marked departure from recent comments from Governor Orr. The policy statement said that “core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced”. Two weeks ago, Orr warned that inflation expectations remained too high.

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The RBNZ lowered its forecast of a peak cash rate at 5.6%, down from 5.7% in the previous forecast. This was not only a more dovish stance of the central bank’s expected rate path, but greatly reduce the likelihood of further rate hikes, given that the current cash rate stands at 5.5%.

As well, Governor Orr said “there was very strong consensus that the official cash rate right now is sufficient”. This seemed to be a change in stance, as Orr has been signalling that rate hikes remained on the table.

The markets reacted to the RBNZ’s dovish stance at the meeting by slashing the odds of a rate hike in May to just 6% compared to 47% before the rate announcement. As well, the New Zealand dollar fell sharply after the rate meeting.

The RBNZ may have decided to continue to pause rather than hike rates, but a rate cut does not look likely in the near term. The RBNZ statement noted that rates will have to remains in restrictive territory for a “sustained period of time” in order to bring inflation back down to the target of 1%-3%. Inflation has been on a downward trend and has fallen to 4.7%, but this remains well above the target.

The RBNZ rate meeting has sent the NZD/USD currency pair sharply lower. Immediately after the announcement, the New Zealand dollar declined by 0.86% and continued to lose ground today. At the time of writing (European session), NZD/USD is down 1.2% and is trading at $0.6096. Earlier, NZD/USD dropped as low as 0.6092, its lowest level since February 13.

The NZX 50, New Zealand’s main stock index, rose slightly, gaining 68.72 points (0.59%) and closing at 11,763.32.

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