The Reserve Bank of New Zealand (RBNZ) held interest rates steady and signalled a less aggressive stance than markets had anticipated, emphasising that accommodative monetary policy was necessary to support the fragile economic recovery.
In its first meeting under Governor Anna Breman, the central bank maintained its official cash rate at 2.25%, in line with expectations.
Although it moved forward its projected timing for the first rate hike from mid-2027 to around the end of the year, this projection remained more cautious than market expectations, which had priced in a hike as early as September or October.
Following the announcement, the New Zealand Dollar slipped 0.5% to 60 US cents, while two-year swap rates dropped 8 basis points to 2.9245%, marking their lowest level since mid-January, Reuters reports.
“If the economy evolves as expected, monetary policy is likely to remain accommodative for some time,” the RBNZ said, that after rising to 3.1% last quarter, inflation should ease back into the 1%-3% target band this quarter.
“As the recovery strengthens and inflation falls sustainably towards the target midpoint, monetary policy settings will gradually normalise.”
Furthermore, the latest official cash rate (OCR) projections indicate the RBNZ expects the rate to reach 2.38% by year-end, suggesting a potential rate hike, Governor Breman acknowledged at her post-decision press briefing.
“But we are not planning on hiking the OCR until we see more inflationary pressures and a stronger economy," she said.
Swaps now reflect a 40% probability of a rate hike in September, down from nearly 70% prior to the decision. Markets are not fully pricing in a hike until December, compared with October before the announcement.
A global leader in rolling back pandemic-era monetary support, the RBNZ raised rates aggressively by 525 basis points between October 2021 and September 2023 to rein in inflation. Since then, it has cut rates by 325 basis points to help pull the economy out of recession.
The economy returned to growth in the third quarter after a prolonged downturn. Employers added staff for the first time in over a year, but the unemployment rate reached a decade-high 5.4%, and New Zealand continued to experience significant population losses, largely to neighbouring Australia.
The housing market stayed weak in January, with prices failing to build on the modest gains seen at the end of last year. In major cities such as Auckland and Wellington, property values remain more than 20% below their late-2021 peaks.
At the press conference, Breman also revealed that the RBNZ plans to increase its meetings to eight per year starting in 2027, up from the current seven, responding to criticism that the nearly three-month summer hiatus is too long.