On Wednesday, New Zealand's central bank opted to keep interest rates steady, emphasizing persistent high inflation and suggesting the possibility of additional monetary tightening if price pressures persist without easing.
The Reserve Bank of New Zealand (RBNZ) kept its official cash rate (OCR) at 5.5%, in line with expectations, but the statement's hawkish tone surprised markets, sending the New Zealand dollar and bond yields higher.
According to the bank statement, “If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further.”
The recent move by the RBNZ marks the first decision since the election of a new government led by Prime Minister Christopher Luxon last month. Throughout the election campaign, the central bank faced significant political scrutiny.
Within its initial 100 days in office, the newly established center-right government has expressed its intention to initiate legislative procedures to reinstate a singular inflation-targeting mandate for the central bank.
This modification entails removing the mandate for the RBNZ to factor in employment when establishing the cash rate, emphasizing a singular focus on inflation.
During a Wednesday press conference, Governor of the Reserve Bank of New Zealand Adrian Orr mentioned that he had engaged in "incredibly constructive" discussions with Prime Minister Luxon and the new finance minister Nicola Willis on Tuesday.
“Our primary objective is to decrease inflation," he emphasized, clarifying that the topic of reverting to a single mandate wasn't discussed with the bank, despite the anticipation of such a possibility.
Annual inflation in New Zealand has declined in recent quarters, currently resting at 5.6%, with the anticipation of returning to the target range by mid-2024.
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