Official cash rate now 4.75% as falling inflation, weak economy drives decision
The Reserve Bank of New Zealand has followed up its 0.25% decrease to the official cash rate in August with another more aggressive cut – lowering the OCR by 50 basis points to 4.75% at its meeting today.
The RBNZ’s latest cash rate cut, decided on Wednesday, October 9, is welcome news for struggling mortgage-holders, and will lead to lower interest rates for homeowners. It will also provide a boost for small businesses and the economy overall.
The decision by Reserve Bank’s Monetary Policy Committee is clearly driven by the poor economy, with rising unemployment, easing inflation and low economic growth all key factors.
In its second consecutive OCR reduction. The RBNZ committee assessed that annual consumer price inflation was within its 1% to 3% inflation target range and converging on the 2% midpoint.
“Economic activity in New Zealand is subdued, in part due to restrictive monetary policy,” the RBNZ MPC said, led by chairman and Reserve Bank governor Adrian Orr (pictured above).
“Business investment and consumer spending have been weak, and employment conditions continue to soften. Low productivity growth is also constraining activity.”
The RBNZ said some exporters had benefited from improved export prices but global economic growth remained below trend.
“The outlook for the United States and China is for growth to slow, while geopolitical tensions remain a significant headwind for world economic activity.
“The New Zealand economy is now in a position of excess capacity, encouraging price- and wage-setting to adjust to a low-inflation economy. Lower import prices have assisted the disinflation.”
The MPC agreed it was appropriate to cut the OCR by 50 basis points to achieve and maintain low and stable inflation, while seeking to avoid unnecessary instability in output, employment, interest rates, and the exchange rate.
“Members agreed that increasing excess capacity is leading to lower inflationary pressure in the New Zealand economy,” the summary record of the MPA’s meeting stated.
“Economic growth is weak, in part because of low productivity growth, but mostly due to weak consumer spending and business investment. High-frequency indicators point to continued subdued growth in the near term.”
The committee said labour market conditions were expected to ease further, with filled jobs and advertised vacancy rates continuing to decline.
“More generally, weak house price growth, lower levels of net immigration, and ongoing fiscal consolidation from spending restraint, are expected to constrain aggregate demand growth.”
The most recent consumer price index inflation data from Stats NZ showed that inflation rose 3.3% in the 12 months to the June 2024 quarter, lower than the 4% increase in the March quarter.
“The 3.3 percent annual price increase is below what was seen during the peak in 2022, and is similar to 3 years ago,” consumers prices senior manager Nicola Growden said.
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