MNI RBNZ WATCH: MPC Holds, Turns Dovish

The Reserve Bank of New Zealand’s monetary policy committee held its official cash rate at 5.5% Wednesday, and shifted to a more dovish tone by stressing evidence of slowing inflation, excess productive capacity and an eased labour market.

In its statement, the MPC noted the extent of the OCR’s “restraint will be tempered over time consistent with the expected decline in inflation pressures,” a departure from May’s statement that “monetary policy needs to remain restrictive."

The overnight index swaps market responded swiftly, immediately upping the chance of 50-basis-point November cut to 128%, before reducing it to 107% shortly after. The market now gives a 50% chance of a 40bp August reduction.

The MPC’s decision to hold was largely expected as it awaits further Q2 data to confirm the falling CPI trend. (See MNI RBNZ WATCH: MPC To Hold, Await Further Data) The RBNZ has held the OCR at its current level since May 2023.

WEAKER INDICATORS

In its statement, the MPC noted more evidence was emerging of excess productive capacity.

“The [MPC] noted that recent higher frequency indicators suggest that near-term growth in business activity has weakened,” the committee said. “A range of business and consumer surveys, and higher frequency spending and credit data, all point to declining activity.”

MPC members added this may indicate tight monetary policy is feeding through to domestic demand more strongly than expected.

The committee also pointed to signs the labour market is easing. “Recent survey measures of hiring intentions and job vacancies indicate flat employment levels,” the MPC added. “Net migration has also fallen in recent months to levels consistent with the pre-COVID period.”

May’s monthly net migration inflow hit its lowest since the border reopened. (See chart)

INFLATION TARGET

There is a risk price-setting behaviour and inflation expectations normalise more rapidly as headline inflation declines, the MPC added.

“Recent monthly Selected Price Indexes suggest weakening in some of the more volatile inflation components, while survey measures of cost pressures and pricing intentions have continued to decline," the MPC noted. "Headline inflation is expected to return to within the 1-3% target range in the second half of this year."

Stats NZ will release Q2 CPI results July 17, following Q1's 4.0% print.

The MPC next meets Aug 1.