NEW Zealand’s central bank decided to hold the cash rate at 5.5 per cent this week because its monetary policy committee remained confident medium-term inflation would return to its 1 to 3 per cent target, deputy governor Christian Hawkesby said on Friday (May 24).
Hawkesby said that cutting interest rates is not a part of near-term policy discussion due to factors that need to be worked through before the bank could “shift that conversation to whether we should hold or cut”.
The Reserve Bank of New Zealand (RBNZ) on Wednesday held the cash rate as expected but wrongfooted markets by warning cuts were unlikely until far into 2025 as it battles stubborn domestic inflation.
The RBNZ forecasts also upped the risk the central bank would hike the cash rate one more time before it begins cutting.
Hawkesby said it would not be one single piece of data that determined the case for a rate hike but rather the impact of that data on the outlook for domestic inflation and inflation expectations.
Consumer price inflation surprised on the high side at 4.0 per cent in the first quarter, while domestic inflation stood at 5.8 per cent. The central bank has raised concerns that factors including local government taxes and insurance continue to push up prices.
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“There’s a lot of uncertainty about the tradables inflation going forward,” Hawkesby added. “To some extent, we are going to have to take that as given and use our monetary polity tools to influence core inflation pressures.”
Hawkesby added while the economy was slowing, inflation expectations were likely to remain higher for longer because of past experience.
“So to get those inflation expectations down, they actually need to be dragged down for a period by the economy cooling off,” he said. REUTERS
