Cash rate stays ‘restrictive’

The Reserve Bank of New Zealand has kept the official cash rate (OCR) at 5.5 per cent after its monetary policy committee decided interest rates need to remain at a restrictive level for a sustained period of time.

It also warns that while current interest rates are restricting spending and inflation is dropping, the latter remains too high and there may be a need to raise the OCR further.

The announcement on November 29 notes the committee remains wary of ongoing inflationary pressures and defies the growing view among economists that cuts may soon be on the way.

“In New Zealand, demand growth has eased but by less than anticipated over the first half of 2023 in part due to strong population growth,” the Reserve Bank explains. 

“The OCR will need to stay restrictive so demand growth remains subdued and inflation returns to the one to three per cent target range.” 

It continues that wage growth has eased from recent peaks, demand for labour is softening and at the same time, strong inward migration is increasing the population and adding to labour supply. 

The Reserve Bank says while population growth has eased supply constraints, the effects on aggregate demand are becoming apparent and this is increasing the risk of inflation remaining above target. 

“The committee is confident the current level of the OCR is restricting demand. However, ongoing excess demand and inflationary pressures are of concern, given the elevated level of core inflation,” it adds. 

“If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further. 

“The monetary policy committee agreed interest rates will need to remain at a restrictive level for a sustained period of time, so that consumer price inflation returns to target and to support maximum sustainable employment.”