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The Monetary Policy Committee Decision

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Record of meeting July 2023

The Monetary Policy Committee (MPC) today announced its decision to maintain the Official Cash Rate (OCR) at 5.50%. This decision comes after discussions on recent developments in the New Zealand economy. The MPC acknowledges that the level of interest rates is currently restricting spending and reducing inflationary pressure as anticipated. However, inflation remains higher than desired, necessitating the need for continued restraint in the OCR for the foreseeable future.

Global Economic Conditions

The global economy continues to experience weak growth, with inflationary pressures showing signs of easing. Many central banks worldwide have implemented significant monetary policy tightening measures. These efforts, coupled with the normalization of international supply chains, declining shipping costs, and lower energy prices, have contributed to a decline in global inflation rates. Consequently, New Zealand has witnessed lower export prices for its goods.

New Zealand Economic Outlook

In New Zealand, inflation is expected to continue its decline, along with measures of inflation expectations. The easing of capacity constraints is anticipated to contribute to a decrease in core inflation. Although employment remains above its maximum sustainable level, labor market pressures are dissipating, with fewer job vacancies reported. Consumer spending growth has slowed, residential construction activity has declined, and house prices have stabilized at more sustainable levels. Additionally, businesses are observing weaker demand for goods and services and displaying cautious investment intentions.

The return of net inward migration aligns with expectations and helps alleviate labor shortages. The recovery of tourism spending also supports demand. Moreover, ongoing repair and rebuild work in regions affected by severe weather events in the North Island will stimulate economic activity in the near term. The Committee foresees a decline in broader government spending, both in inflation-adjusted terms and as a proportion of GDP.

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Monetary Policy Committee’s Confidence and Conclusion

The MPC expresses confidence that maintaining interest rates at a restrictive level for an extended period will pave the way for consumer price inflation to return to the targeted range of 1 to 3% annually. Simultaneously, this stance will support the achievement of maximum sustainable employment.

Consequently, on Wednesday, July 12, the Committee reached a consensus to keep the Official Cash Rate unchanged at 5.5%.