NZ cuts still a 2025 story

As expected, the Reserve Bank of New Zealand left the official cash rate (OCR) unchanged at 5.5 per cent at its April Monetary Policy Review meeting. ANZ Research continues to expect cuts won’t be on the table until 2025.

In commentary very similar to what it provided in February, the bank said in the wake of the decision that “interest rates need to remain at a restrictive level for a sustained period”. Considerably more certainty is required before anyone can start contemplating cuts.

Recent weakness in demand and activity evident in both fourth-quarter gross domestic product data and the first-quarter business confidence has no doubt reinforced the RBNZ’s confidence that domestic inflation is on track to ease meaningfully over coming quarters.

The news is less comforting on the global inflation front, with oil prices markedly higher, but that only got the most passing of mentions from the RBNZ.

If domestic inflation proves stickier than expected and/or there is evidence of flow-through impacts onto broader price pressures and inflation expectations, the RBNZ may have an issue, but that’s not a problem for today.

ANZ Research’s OCR forecast remains unchanged: domestic inflation will fall a little more slowly than the RBNZ expects, so cuts are a 2025 story.

It’s all about the data

First-quarter consumer inflation data due in April will be closely watched. It’s looking like the RBNZ will get yet another upside surprise on domestic inflation (the fourth in a row, but the underlying disinflation trend remains intact).

First-quarter labour market data due for release in May is arguably more important. ANZ Research expects it to confirm the clear message coming from business surveys: the labour market is no longer inflationary as strong growth in supply meets weakening demand.

While financial markets and the RBNZ will have a high-level feel for fiscal pressures ahead of the May Monetary Policy Statement, the budget itself will be released the following week.

All told, the April decision was a placeholder, as expected. Kudos to the RBNZ for efficiently issuing the shortest policy assessment ever seen so we can all get back to watching, worrying and waiting.

Sharon Zollner is Chief Economist & David Croy is Senior Strategist at ANZ Institutional

This article is an edited excerpt from the ANZ Research report “RBNZ MPR Review: keep calm and carry on”, published April 10, 2024