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Finally some lightening in the RBNZ’s tightening

At last, a change at the Reserve Bank of New Zealand with the world’s most gung-ho central bank slowing its chain of rate rises to just 0.25% at its May meeting yesterday.

The lift in the Official Cash Rate (OCR) from 5.25% to 5.50% put the rate will above Australia’s 3.85% and followed a surprise 0.50% increase in April.

The headline on the release from the RBNZ made its monetary policy stance very clear – “Official Cash Rate set to remain restrictive” it declared.

No more need be said and NZ analysts added that up till last week’s national budget with its higher spending (there’s an election later this year), the 5.50% looked like being the central bank’s peak (or terminal) rate.

But now they said there could be another 0.25% added at the next meeting in six weeks.

RBNZ Governor Adrian Orr said in the usual post-meeting statement that the central bank expected inflation to continue to decline from its peak of 7.3% last year, but said “core inflation pressures” would remain until capacity constraints in the economy eased further.

“The OCR will need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1-3% annual target range, while supporting maximum sustainable employment,” Orr said in the statement.

He also noted the impact of strong migration, saying that while that would help ease labour shortages, its net impact on overall spending was “uncertain”.

(That sounds a bit like the message we in Australia are receiving from the RBA.)

The forecast for interest rates the RBNZ revealed on Wednesday still showed the official cash rate peaking at 5.50%, but with a slightly steep incline to that level this year and faster drop-off in 2025.

It forecast the OCR would drop back to 3.3% at the end of its forecast period in June 2026.

The bank’s latest monetary policy statement predicted annual inflation would drop back to 4.9% by the end of this year and would fall back below the 3% upper limit of its target band in September next year, when it forecast inflation would drop to 2.7%.

Unlike the NZ Treasury, the Reserve Bank still expects a technical recession this year, but only the very mildest of ones, with a 0.2% fall in GDP pencilled in for the June quarter and a further 0.1% reduction in the three months to September

The bank’s monetary policy committee said it “discussed the impact of Budget 2023” and noted fiscal policy was projected to add to demand over the 2023-24 financial year (the election year), before dampening demand in subsequent years.

The post meeting statement also pointed out that consumer spending growth had “eased and residential construction activity has declined, while house prices have returned to more sustainable levels.”

“More generally, businesses are reporting slower demand for their goods and services, and weak investment intentions. Businesses report that a lack of demand, rather than labour shortages, is now the main constraint on activity.

Like in Australia there has been a return of net inward migration since international borders reopened and the post meeting statement said the central bank expects the pace of immigration to ease back toward pre-COVID-19 trend levels over coming quarters.

“While immigration has assisted to ease labour shortages, its net impact on overall spending is uncertain. The recent recovery in tourism spending, to around three-quarters of its pre-COVID-19 trend level, is also supporting demand.”

An added factor is the repair and rebuild facing significant regions of the North Island – due to the recent severe weather events (like the rebuild of Christchurch from 2011-12 onwards).

The statement said this “will support economic activity, in particular the horizontal construction sector. The timing of this predominantly government investment will be spread over several years.”