PHOTO: The Reserve Bank of New Zealand. FILE
As anticipated, the Reserve Bank has opted to keep its key interest rate steady and has affirmed that elevated rates will persist for an extended duration. The official cash rate has remained at 5.5 percent since May, with the bank emphasizing the need for further efforts to rein in inflation.
Interest rates are curbing economic spending, and consumer price inflation is decreasing, aligning with the Committee’s Remit. Despite this, inflation persists at a level deemed too high, prompting caution regarding ongoing inflationary pressures.
Globally, economic growth has surpassed initial expectations this year but still falls below the trend and is expected to decelerate further. This subdued growth outlook will continue to put a damper on New Zealand’s export revenues.
Within New Zealand, demand growth has eased, albeit less than anticipated in the first half of 2023, partly due to robust population growth. To keep demand growth in check and steer inflation back into the target range of 1 to 3 percent, a need exists for the OCR to remain restrictive.
Wage growth has moderated from recent peaks, and the softening demand for labor, coupled with job advertisements below pre-COVID-19 levels, indicates a shifting employment landscape. Meanwhile, heightened inward migration is boosting the population and expanding the labor pool.
Although population growth has alleviated supply constraints, its impact on aggregate demand is now evident, heightening the risk of inflation persisting above the target range.
The Committee asserts that the current OCR level effectively restrains demand. Yet, concerns linger about sustained excess demand and inflationary pressures, particularly given the elevated core inflation. Should inflationary pressures exceed expectations, a further increase in the OCR may be necessary.
The consensus within the Monetary Policy Committee is that interest rates must remain at a restrictive level for an extended period. This approach aims to steer consumer price inflation back to target levels and support the attainment of maximum sustainable employment.