Reserve Bank holds official cash rate at 5.5%

Reserve Bank Governor Adrian Orr.
Reserve Bank Governor Adrian Orr.
The Reserve Bank has held the official cash rate unchanged at 5.5 percent for the seventh consecutive meeting.

The central bank said the economy has slowed, unemployment was rising, and acknowledged household budgets were under pressure .

"While weaker capacity pressures and an easing labour market are reducing domestic inflation, this decline is tempered by sectors of the economy that are less sensitive to interest rates," the monetary policy committee said in a statement.

"These near-term factors include, for example, higher dwelling rents, insurance costs, council rates, and other domestic services price inflation. A slow decline in domestic inflation poses a risk to inflation expectations."

It said annual consumer price inflation remained above the 1 to 3 percent target band, and monetary policy needed to remain restrictive to ensure inflation returned to target within a reasonable timeframe.

In its updated forecasts, the bank predicted a 5.7 percent OCR peak at the end of this year, before the rate started to fall again.

That indicates that it believes that another increase remains a possibility.

In the February update, the peak had been 5.6 percent.

Before Wednesday's update, economists had been unanimous in their view that the rate would remain on hold.

Markets reacted to the changed tone, with one-year swap rates jumping from 5.33 percent just before the release to 5.41 percent soon after.

The New Zealand dollar lifted half a cent against the US dollar.

The bank said it still expected inflation to return to the 1 percent to 3 percent target range by the end of 2024.

"The welcome decline in inflation in part reflects lower inflation for goods and services imported into New Zealand. Globally, consumer price inflation has declined from 30-year highs in many advanced economies.

However, services inflation is receding slowly, and expected policy interest rate cuts continue to be delayed."

It said domestic inflation was being held up by things such as rents, insurance costs and council rates.

"A slow decline in domestic inflation poses a risk to inflation expectations."

It said the government's slower spending was likely to contribute to weaker aggregate demand.