New Zealand’s central bank will need to hold interest rates at their current level “for a prolonged period” and should remain open to further hikes if necessary to tame inflation, the International Monetary Fund said.
(Bloomberg) — New Zealand’s central bank will need to hold interest rates at their current level “for a prolonged period” and should remain open to further hikes if necessary to tame inflation, the International Monetary Fund said.
The Reserve Bank’s rapid increases of the Official Cash Rate to date are “appropriate” and are helping to slow consumer-price gains, the IMF said in the concluding statement of its Article IV review of New Zealand’s economy released Wednesday in Wellington.
“However, as non-tradable inflation persists, there is little scope to lower the OCR for a prolonged period,” it said. “A re-ignition of demand, including due to insufficient fiscal consolidation, and a stalling of inflation above target would call for further tightening of monetary policy.”
The RBNZ, which has hiked the OCR by 5.25 percentage points in the past 20 months, surprised economists in May when it signaled the tightening cycle had concluded at 5.5%. Still, the central bank doesn’t expect to start easing policy until the third quarter of 2024.
The IMF said the economy is expected to continue to slow as monetary tightening takes hold, with the bulk of the impact of rate hikes to be felt in 2023 and 2024.
It expects annual growth to cool to around 1% this year and next with the possibility of a technical recession.
However, inflation is likely to ease gradually and return to the RBNZ’s 1–3% target range only in 2025, the fund said. That’s later than the RBNZ’s projection of a return to target in the third quarter of 2024.
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