New Zealand’s central bank kept interest rates unchanged for a fourth straight meeting, but signalled there’s an increased risk it could hike again next year. The local dollar jumped.

The Reserve Bank’s (RBNZ) Monetary Policy Committee held the official cash rate (OCR) at 5.5% on Wednesday in Wellington, as expected by all 23 economists surveyed. The bank’s new forecasts show a higher track for the OCR through 2024, implying a greater chance of an increase, and no reduction until mid-2025. 

“Inflation remains too high, and the committee remains wary of ongoing inflationary pressures,” the RBNZ said. “Interest rates will need to remain at a restrictive level for a sustained period of time.”

Inflation slowed more than expected to 5.6% in the third quarter, and investors have been betting the RBNZ will be among global central banks pivoting to rate cuts in 2024, possibly as soon as May. But record immigration and a housing recovery suggest it could take some time for inflation to return to the RBNZ’s 1%-3% target band.

The New Zealand dollar rose almost half a US cent after the decision, extending Wednesday’s gain to 0.9%. It bought 61.92 US cents at 2.58pm in Wellington.

“The RBNZ statement hammered home the message that interest rates need to remain high for a sustained period, and with some risk a further OCR increase would be needed,” said Nick Tuffley, the chief economist of ASB Bank. “This message was a shot across the bows of those picking a relatively swift start to the eventual easing cycle.”

RBNZ governor Adrian Orr was set to hold a press conference at 3pm local time.

The RBNZ’s updated forecasts now show the average OCR rising to a peak of 5.69% next year, compared with 5.59% in its previous projections. The first rate cut is now envisaged around the second quarter of 2025 rather than in the first.

Hikes discussed

“Members discussed the possibility of the need for increases in the OCR,” the RBNZ said in its record of meeting. “Members agreed that with interest rates already restrictive, it was appropriate to wait for further data and information to observe the speed and extent of easing in capacity pressures in the economy.”

Most economists think the OCR has peaked for this cycle, and that the next move will be a cut. Still, there is a wide range of views on the timing, from as soon as February next year to as late as February 2025. 

“The committee is confident that the current level of the OCR is restricting demand,” the RBNZ said. “However, ongoing excess demand and inflationary pressures are of concern, given the elevated level of core inflation. If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further.”

Inflation is expected to fall below 3% by the third quarter of 2024, unchanged from the previous projections. But the economy is now seen avoiding a recession in the second half of 2023, according to the new forecasts.

“While growth in parts of the economy is slowing, there has been less of a decline in aggregate demand growth than expected earlier in the year,” the RBNZ said. “Members noted that net immigration had been higher than previously assumed.”

New Zealand is experiencing a record inflow of migrants, adding to risks that inflation will remain sticky. Net immigration rose to 118,835 in the year ended September.

While this has increased the supply of workers into a tight labour market, “the demand-side effects are becoming apparent”, the RBNZ said. 

“Strong population growth has contributed to an increase in housing rents,” it said. “Rent increases, and any increases in construction costs in response to greater housing requirements, affect inflation directly.”

  - Bloomberg