Cash rate likely to rise soon

The Reserve Bank of New Zealand has held the official cash rate (OCR) at 2.25 per cent amid indications of weaker domestic confidence and spending.

Its monetary policy committee made the decision on May 27 after noting annual consumer price inflation was 3.1 per cent in the March quarter. 

However, it warns the OCR will most likely need to increase sooner and by more than envisaged in the February monetary policy statement.

“All committee members agreed that increasing the OCR at upcoming meetings would likely be necessary to ensure higher near-term inflation does not feed through to higher medium-term inflation,” the bank says. 

“The committee judges that this is a proportionate response to bring inflation to target in a reasonable timeframe without creating unnecessary volatility in output. 

“The pace of OCR increases will depend on the relative influence of persistent wage- and price-setting behaviour versus weaker economic activity on medium-term inflation pressures.”

The bank notes the Middle East conflict is increasing near-term inflation and weakening economic activity. 

It expects inflation to peak at 4.3 per cent in the September quarter and to return to the two per cent target mid-point in mid-2027. 

“Currently, core inflation, wage growth, and medium to long-term inflation expectations remain consistent with inflation returning to the two per cent target mid-point over the medium term.”

The bank adds the global economic situation remains uncertain, with supply chain disruptions, higher prices for petrochemicals, and a more fragmented global trading environment impacting the outlook. 

“Domestically, business contacts and surveys indicate weaker confidence and spending,” it continues. 

“For some firms, rising costs are squeezing profit margins and curbing investment and hiring intentions. Consumer confidence has fallen sharply, and the housing market remains weak.”