The Reserve Bank of New Zealand decided to keep the official cash rate unchanged at 5.5% as expected. However, the Central Bank reduced its forecast peak rate to 5.6% from 5.7%, signaling a more dovish stance compared to earlier projections. This decision, which aligned with most forecasts but defied some market expectations of a rate rise, led to a selloff in the New Zealand dollar and a bond rally.
The move reflects a shift in the bank's assessment, noting that core inflation and inflation expectations have declined and that risks are now more balanced. Despite a 23% market anticipation of a rate hike this week, the probability dropped significantly post-announcement. Key highlights:
- the Committee expressed confidence that the current Official Cash Rate (OCR) level is restricting demand.
- central banks globally might need to maintain high policy interest rates longer than financial markets currently anticipate, to ensure inflation targets are met.
- headline inflation remains above the target range of 1.00-3.00%.
- core inflation and most inflation expectations have decreased, and inflation risks are now more balanced.
- New Zealand's annual inflation rate has decreased recently, currently at 4.7%, with expectations of returning to the target range later in the year.
RBNZ Governor Adrian Orr emphasized the consensus that the current rate is sufficient, and chief economist Nick Tuffley of ASB noted the balanced risk perspective in the bank's statement.
The New Zealand dollar (NZD) is one of the weakest currencies today in the first part of the day. The currency depreciated by up to 1.00% against other leading G10 currencies. Source: xStation 5
