The Reserve Bank of New Zealand (RBNZ) has decided to keep the official cash rate at 5.50%, aligning with economists’ expectations. With a national election approaching this month, concerns over cost-of-living pressures and economic management are at the forefront of voters’ minds.
Despite maintaining a hawkish bias, the RBNZ is actively evaluating whether their actions thus far have been sufficient in controlling inflation. In a statement, the bank explained, “The Committee agreed that interest rates may need to remain at a restrictive level for a more sustained period of time, to ensure annual consumer price inflation returns to the 1 to 3% target range and to support maximum sustainable employment.”
Following the onset of the Covid-19 pandemic, the RBNZ, like many other central banks globally, quickly raised interest rates as inflation surged. While there has been progress in mitigating price pressures, central bankers are cautiously monitoring risks such as resurgent energy prices and robust competition in the housing market leading to higher rental costs.
Despite concerns, New Zealand experienced unexpectedly strong gross domestic product (GDP) growth in the second quarter. This development raises the risk that the RBNZ may determine the economy is operating above full capacity once again. Inflation over the 12-month period ending in June stood at 6.0%, exceeding the central bank’s target band, although it has decreased from the peak of 7.3% observed just a year earlier.
Heightened Concerns about Inflation Pressure
As the much-anticipated meeting approaches, economists at Westpac have pointed out that recent data suggests a growing apprehension regarding the persistence of inflation pressures. However, in spite of this, they believe that the Reserve Bank of New Zealand (RBNZ) should be content with the current market pricing for the cash rate, even beyond November.
The RBNZ acknowledges that interest rates are currently restricting economic activity and curbing inflationary pressure, as needed. In fact, it anticipates that inflation will eventually align with the target range by the second half of 2024.
Nonetheless, the central bank has highlighted several risks that could potentially affect this projection. For instance, it identifies global oil prices as a key factor that might drive up domestic costs in the upcoming months, leading to higher-than-expected headline inflation.
The cost of living has become a prominent topic in the lead-up to the October 14 election. The ruling center-left Labour Party, led by Prime Minister Chris Hipkins, is facing off against the center-right National Party, headed by former airline executive Christopher Luxon. Recent research conducted by Essential Research reveals that 65% of surveyed voters in New Zealand consider reducing cost-of-living pressures to be of utmost importance. In fact, in the same survey published last month, managing the economy was ranked as very important by 61% of voters, coming ahead of accessing health services and addressing the crime rate.