Photo: RNZ
The Reserve Bank has left the official cash rate (OCR) unchanged at 5.5 percent, as expected.
The central bank (RBNZ) reaffirmed its July stance that the OCR was high enough to keep slowing inflation and the economy.
"The committee agreed that the OCR needs to stay at restrictive levels for the foreseeable future to ensure annual consumer price inflation returns to the 1 to 3 percent target range," the Monetary Policy Committee said in a statement.
It said inflation, currently at an annual rate of 6.0 percent, was expected to keep falling as would inflation expectations, with a slowing global economy, cooler labour and housing markets.
It maintained its previous forecast that inflation would be back in the target band in the second half of 2024, but warned that domestic core inflation pressures remained strong.
"Headline inflation and inflation expectations have declined, but measures of core inflation remain too high.
"The committee agreed that the current level of the OCR remains contractionary and is constraining domestic spending as needed."
However, the committee also noted that economic activity and inflation pressures were likely stronger than expected in the three months ended June, and it raised its third quarter inflation forecast to 2.1 percent rise in consumer prices from 1.8 percent, while pushing out its recession forecast to be in the third and fourth quarters of the year.
The RBNZ forecast track for the OCR was pushed out slightly implying little chance of a rate cut before then end of next year.
A minority view among economists was that the RBNZ will be forced to tackle stubborn inflation pressures with another 25 basis point rise to 5.75 percent, probably in November.
The RBNZ made 12 consecutive rate rises between October 2021 and May 2023, lifting the OCR from a record low of 0.25 percent to a 14-year high of 5.5 percent.
But the central bank signalled in May it felt it had done enough to get inflation back into the 1-3 percent target band, and would adopt a "watch, worry, and wait" approach.
Economists had been unanimous in expecting the RBNZ to hold rates steady this week.
Wheels are falling off the economy - BNZ
BNZ head of research Stephen Toplis said the RBNZ tweaking its rate track to project the cash rate peaking at 5.59 percent did not suggest more rate hikes would be on the way.
"This could be interpreted as an indication from the RBNZ that it thinks there is a greater chance of a hike in the next twelve months than a cut. So, mildly hawkish at the margin but certainly nothing that says a further rate hike is likely," he said.
Toplis warned was a risk that the economic downturn would become more aggressive than expected.
"In our view the wheels are starting to well and truly fall off the New Zealand economy. In today's August Monetary Policy Statement the Reserve Bank recognises this in assuming the economy goes back into recession in the second half of this year," Toplis said.
He said recent surveys from the services and manufacturing sectors have "turned nastily negative".
ASB senior economist Mark Smith said the central bank's policy assessment had a "hawkish tinge, showing concern over the persistence of high domestic inflation".
"Not only was the possibility of a higher OCR entertained, but the RBNZ said that it was likely that the OCR would need to remain 'near its current level' for longer than previously expected, in order to meet its inflation objectives," he said.
A "soft landing" for the economy looked achievable, Smith said.
"Risks to the inflation outlook were largely balanced. Nevertheless, the bank noted that domestic inflation was still too high and was only declining slowly."
ASB said its view was that the OCR would remain on hold at 5.5 percent, and cuts were a "long way off".