OCR remains unchanged at 5.5%

New Zealand's Reserve Bank has kept the official cash rate at 5.5%, in line with many predictions - a move likely to disappoint people struggling with mortgage payments.

Today's decision indicates the central bank and Governor Adrian Orr likely feel inflation is still too stubborn for the country to afford a rates cut. 

The benchmark rate was left unchanged for the fourth meeting in a row.

“Over the past year or so, the New Zealand economy has evolved broadly as anticipated by the Committee,” the Reserve Bank (RBNZ) said. 

“Core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced.”

However, headline inflation was still well above the 1 to 3 percent target band, limiting the Committee’s ability to tolerate upside inflation surprises.

There’s a strong correlation between the OCR and bank rates, as anyone who has re-fixed a...
There’s a strong correlation between the OCR and bank rates, as anyone who has re-fixed a mortgage in the past six months may have felt. PHOTO: GETTY IMAGES
ASB chief economist Nick Tuffley said the tone “wasn’t as hawkish as it could have been, with the risks now noted as more balanced as opposed to the upward skew noted in November’s MPS.”

“The OCR track was revised down slightly in the near term to a peak of 5.60 per cent (previously 5.69 per cent) but was little changed over the longer term,” he said. 

“The track still implies some chance of an OCR hike over the remainder of 2024, and is consistent with OCR cuts from around [the second quarter] 2025.”

Inflation was still forecast to get back within the 1-3 per target band by September 2024 and to the 2 per cent mid-point by the end of December 2025 (a fraction later than in the November forecasts), he said.

ASB continues to expect the RBNZ will cut the benchmark interest rate in November.

The New Zealand dollar and wholesale interest rates fell sharply in response to the announcement at 2pm. The dollar was at US61.20c, down from US61.80c. In interest rates, the two-year swap rate, which can influence home mortgage rates, dropped to 5.05 per cent from 5.21 per cent.

'Sobering outlook'

The central bank painted a somewhat sobering outlook for the global economy but did point to some benefits to New Zealand. 

“Global economic growth remains below trend and is expected to slow further during 2024. This subdued environment will support a further moderation in New Zealand’s import price inflation.”

The outlook for China’s economy was very poor, relative to recent historical norms, the RBNZ committee added.

“A more general risk to global growth is that central banks may need to keep policy interest rates at restrictive levels for longer than currently reflected by financial market pricing, to ensure that inflation targets are met.”

Heightened geopolitical and climate conditions were also a risk for inflation, it said, indicating there might not be a rates cut anytime soon.

The OCR must stay at a “restrictive level for a sustained period of time” to ensure headline inflation returned to the 1 to 3 percent target.

Headline inflation most usually refers to the Consumers Price Index (CPI).

Annual inflation, measured by the CPI, was 4.7 per cent in the final three months of 2023.