The Monetary Policy Committee today agreed to leave the Official Cash Rate (OCR) at 5.50 percent.
Reserve Bank of New Zealand Maintains OCR at 5.5%
As we approach the next meeting of the Reserve Bank of New Zealand (RBNZ) on Wednesday, July 10, the consensus is clear: the Official Cash Rate (OCR) is expected to remain unchanged at 5.5%. This decision marks a full year of steady monetary policy, following the last rate hike in May 2023. The RBNZ has maintained this rate after a series of aggressive hikes that raised the OCR from just 0.25% in October 2021 to the current 5.5% to combat surging inflation.
The Current Economic Landscape
The RBNZ, under Governor Adrian Orr, has adopted a “watch, wait, and worry” stance, aiming to bring headline inflation back within its target range of 1% to 3%. The Consumer Price Index (CPI) inflation has shown a positive trend, decreasing from 6.7% at the start of last year to the current 4%. While this overall direction is promising, the domestic component of inflation, known as non-tradeable inflation, remains a concern.
Non-Tradeable Inflation: A Stubborn Challenge
Non-tradeable inflation, which excludes international factors and focuses on domestic services and goods, was last recorded at 5.8% in the March quarter. This figure shows only a slight improvement from previous quarters, indicating a persistent challenge for the RBNZ. According to Viv Hall, a former RBNZ director and Emeritus Professor at Victoria University of Wellington, this sticky component is critical for the bank’s OCR decisions.
Future Projections and Economic Impact
Looking ahead, the RBNZ’s forecasts suggest the first potential OCR cut might occur in the second half of 2025. However, major banks like ANZ and Westpac are slightly more optimistic, predicting a rate reduction in early 2025. This timeline reflects the cautious approach needed to manage inflation without destabilizing the economy.
Viv Hall anticipates an OCR still in the 5% range by mid-2025, setting the stage for a robust economic rally. Despite the current GDP growth hovering around zero each quarter, this period of economic stability is reminiscent of the early 1990s. Once inflation was controlled during that era, the economy experienced a significant and prolonged upswing.
Inflation and Economic Data
Some frustration arises from the timing of key data releases. The June quarter CPI figures, crucial for assessing inflation trends, will be released on July 17, a week after the upcoming OCR review. Nonetheless, early indicators like the Selected Price Indexes, which account for about 45% of the CPI, show encouraging signs, with food prices experiencing their smallest increase in five years. The RBNZ forecasts annual inflation to fall to 3.6% by June and further to 3.0% by September 2024, dipping just below 3.0% by December 2024.
Since the last OCR review in May, economic data has been limited but revealing. The March quarter GDP showed slight growth of 0.2%, following a period of negative growth, including a technical recession in late 2023. These indicators suggest the economy is not collapsing but is in a precarious state, while inflation is gradually decreasing.
Conclusion: Navigating the Economic Waters
For businesses and consumers, the steady OCR at 5.5% represents a period of adjustment and preparation. At Omega Financial Services, we understand the importance of staying informed about these economic trends and their implications. Our team is here to provide expert guidance and support as we navigate these complex financial waters together.
