New Zealand (Commonwealth)_It is to share some interesting insights about the Reserve Bank of New Zealand’s (RBNZ) current stance on interest rates. While many experts believe that the RBNZ has already reached its interest rate peak, there is growing speculation that the central bank will maintain the cash rate at its current level for quite some time, possibly until mid-2024.
According to Capital Economics’ Abhijit Surya, the RBNZ has successfully steered the economy into a recession, and early indicators suggest that inflationary pressures have eased. This has led some analysts, like Surya, to revise their forecasts, predicting that the RBNZ will only consider cutting rates in the first quarter of 2024, rather than by the end of this year as previously thought.
Interestingly, other experts have even more optimistic projections. TD Securities believes that New Zealand’s key interest rate will remain at 5.5 percent until June 2024, while Bank of America expects it to persist until July 2024.
Recent data further supports the notion that rates have peaked in New Zealand. Food inflation has eased since April, and rental inflation is expected to decelerate further. We eagerly await the release of the June food and rental price reports on July 13 to gain more insights.
Additionally, the latest ANZ business survey indicates that firms’ inflation expectations for the year ahead fell to 5.3 percent in June, a substantial decline from the peak of 6.4 percent in November. Moreover, pricing expectations among businesses suggest a potential moderation of inflation.
On a positive note, the June quarter household labour force survey revealed a significant increase in the number of residents aged 15 years and over who can work. This rise in the labor force, supported by immigration gains, could alleviate pressure for higher wages and further deflate inflationary pressures.
Although the New Zealand Institute of Economic Research’s quarterly survey indicates that many businesses anticipate a deterioration in general economic conditions, there is a slight improvement in overall confidence, albeit from low levels.
Abhijit Surya highlights a crucial reason for the RBNZ’s cautious approach – they would like to see more definitive evidence of a slackening labor market. Notably, unit labor cost growth is currently at its highest pace since the early 1990s, suggesting that services inflation might persist for some time. Furthermore, while increased net overseas migration may relieve wage pressures, it also adds to aggregate demand in the economy. Balancing these opposing forces from an inflationary standpoint remains a challenge.
It’s worth noting that the RBNZ has already raised its key rate by 5.25 percentage points since October 2021.
In summary, the RBNZ’s current position on interest rates suggests that they are in no hurry to loosen monetary policy. However, as economic indicators evolve and more conclusive evidence surfaces, we can anticipate adjustments to the cash rate to ensure the stability and growth of New Zealand’s economy.
