Cash rate tipped to stay at 5.5%

The Reserve Bank of New Zealand has increased the official cash rate (OCR) by 25 basis points to 5.5 per cent, noting the decision had gone to a vote by the bank’s seven-person monetary policy committee for the first time.

Governor Adrian Orr, pictured, says the hike on May 24 was approved by five votes to two, with two advising no increase. The committee has previously reached its decision by consensus.

The Reserve Bank adds the OCR is expected to stay at 5.5 per cent well into next year, with no cuts anticipated until the third quarter of 2024.

Orr says the committee expects inflation to continue to fall from its peak of 7.3 per cent last year, but notes  “core inflation pressures” will remain until capacity constraints in the economy ease further.

“The OCR will need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the one per cent to three per cent annual target range, while supporting maximum sustainable employment,” explains the committee.

“International supply chain constraints have also eased following a period of disruption, and shipping costs have declined. The weaker global growth has led to lower export prices for New Zealand’s goods.  

“In New Zealand, inflation is expected to continue to decline from its peak and with it measures of inflation expectations.”

The Reserve Bank also says that while employment is above its maximum sustainable level, there are signs of labour shortages easing and vacancies declining.

It adds consumer spending growth has also eased, residential construction activity has fallen, and 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.”