New Zealand holds cash rate at 5.5% amid inflation & growth challenges

The committee acknowledges that high interest rates are currently curbing spending within the economy. This strategy has led to a decline in consumer price inflation, aligning with the committee's remit. Despite these efforts, inflation rates remain uncomfortably high, prompting continued vigilance against persistent inflationary pressures.

Globally, economic growth has surpassed expectations set earlier this year, yet it still trails behind the usual trends. Moreover, a further slowdown is anticipated, which could dampen New Zealand's export revenues given the subdued growth outlook, the committee said in a press release.

Domestically, demand growth has moderated but not as significantly as expected in the first half of 2023. This trend is partly attributed to robust population growth. Consequently, the OCR must remain at a restrictive level to ensure demand growth stays in check and inflation reverts to the target range of 1 to 3 per cent.

In the labour market, wage growth has shown signs of slowing from recent highs. The demand for labour is decreasing, as evidenced by job advertisements falling below pre-COVID-19 levels. Concurrently, strong inward migration is bolstering the population and expanding the labour supply.

This increase in population, while mitigating some supply constraints, is beginning to visibly impact aggregate demand. This shift elevates the risk of inflation staying above the targeted range.

The committee stands firm in its belief that the current OCR is effectively reining in demand. However, the persisting excess demand and inflationary pressures, coupled with high core inflation, are concerning. The committee warns that if inflationary pressures exceed expectations, a further hike in the OCR might be necessary.

ALCHEMPro News Desk (DP)