Investing.com-- The Reserve Bank of New Zealand kept interest rates steady on Wednesday as expected, with the bank stating that inflation still remained too high and that it could potentially hike interest rates further to quell price pressures.
The RBNZ held its official cash rate (OCR) at 5.50% for a fourth straight month after having flagged an indefinite pause in its rate hike cycle earlier this year. The bank had raised the OCR by a cumulative 525 basis points between August 2021 and May 2023.
But Wednesday’s announcement marked a shift in the bank’s stance on an extended pause, as it warned that high interest rates had not pulled back demand by as much as expected.
“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,” RBNZ Governor Adrian Orr said in a statement.
"Further slowing in spending growth is needed to reduce demand toward the economy’s ability to supply goods and services, to ensure that consumer price inflation returns to its target range."
The bank’s rate hikes over the past two years were aimed chiefly at bringing consumer price index (CPI) inflation within its 1% to 3% target range. But while the rate hikes did pull inflation down substantially, CPI inflation still remained well above the RBNZ’s target range, at 5.6% in the third quarter.
A string of damaging cyclones had battered New Zealand earlier this year. Rebuilding efforts in the wake of the storms, coupled with an already tight labor market and high retail spending were the key drivers of inflation this year.
While the New Zealand fell into a technical recession earlier this year, growth rebounded sharply in the third quarter, which in turn kept inflationary pressures high.
The New Zealand dollar shot up 1% after the RBNZ’s announcement, given that any more interest rate hikes are likely to make the currency appear more attractive.