New Zealand’s central bank kept its official cash rate at 5.50% on Wednesday but said that inflation was too high and that a rate hike was on the table. The New Zealand dollar climbed sharply against the US dollar but has pared much of those gains.
The Reserve Bank of New Zealand (RBNZ) decision to hold rates was widely expected. This marks a seventh straight time that the RBNZ has maintained interest rates. What was somewhat of a surprise was the hawkish tone of the rate statement, which provided a boost to the New Zealand dollar earlier today.
The Monetary Policy Committee (MPC) discussed the possibility of a rate hike and the rate statement noted that rates may have to remain "at a restrictive level for longer than anticipated in the February Monetary Policy Statement to ensure the inflation target is met".
This language was surprisingly blunt and expressed deep concern about the slow decline in inflation, in particular services inflation. New Zealand’s inflation rate dropped to 4.0% in the first quarter, down from 4.6% in the fourth quarter of 2023. This was higher than the RBNZ’s forecast of 3.8%, which appears to have been too optimistic. The RBNZ’s steep rate-tightening cycle has slashed inflation but it remains at double the midpoint of the 1-3% target range.
RBNZ: High inflation Could Mean a Rate Hike
As a result of the hotter-than-expected inflation data, the central bank now expects that the consumer price index (CPI) will not fall back to the target range of 1-3% until the fourth quarter, compared to the third quarter in the previous forecast.
The RBNZ has pushed back its forecast of when it expects to lower rates from the second quarter of 2025 until the third quarter. More importantly, the central bank has raised the possibility of an actual rate hike to 60% by the end of the year. The markets however, still expect the RBNZ to start lowering rates and have priced in at least one rate cut by the end of the year.
New Zealand Dollar and Stock Market Higher after RBNZ Announcement
Today’s rate meeting dampened any hopes of a rate cut in the near-term and sent the NZD/USD currency pair to a daily high of$ 0.6152, up 0.80%, following the rate announcement. The New Zealand dollar has pared much of these gains and is currently trading at 0.6116, up 0.41% on the day.
The NZX 50, New Zealand’s main stock index, also posted gains today and gained 56.29 points (0.48%), closing at 11,732.28.
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