RBNZ Holds Key Interest Rate; Delays Rate Cut Plan

(RTTNews) - New Zealand's central bank maintained its benchmark rate for the seventh consecutive session and signaled a delay in rate cuts as services inflation is receding slowly.

The Monetary Policy Committee of the Reserve Bank of New Zealand, led by Governor Adrian Orr, decided to hold the Official Cash Rate at 5.50 percent.

The MPC observed that inflation is likely to return to within the 1 to 3 percent target range by the end of 2024 and components of domestic services inflation persist.

"The Committee agreed that monetary policy needs to remain restrictive to ensure inflation returns to target within a reasonable timeframe," the bank added.

The welcome decline in inflation partly reflects lower inflation for goods and services imported into New Zealand, the RBNZ said. Inflation declined sharply in many advanced economies, the bank noted.

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

Further, policymakers observed that weaker capacity pressures and an easing labor market are lowering domestic inflation but this fall is tempered by sectors that are less sensitive to interest rates.

They noted that a slow decrease in domestic inflation poses a risk to inflation expectations.

Globally, services inflation eased at a slower than anticipated pace at the start of the year. Nevertheless, inflation in trading partners of New Zealand is expected to continue to decline.

However, Capital Economics' economist Abhijit Surya said the bank is overstating the upside risks to the inflation outlook. The economist viewed that there is still a strong case for the bank to loosen policy by year-end.

If inflation returns to the target by the third quarter, the bank should have no qualms about loosening policy setting by the fourth quarter of this year, even if it is currently signaling otherwise, Surya said.