By James Glynn
SYDNEY--The Reserve Bank of New Zealand signaled that interest rates might need to remain restrictive for longer than expected due to stubborn inflation, delivering a hawkish shock to money markets.
The central bank left its official cash rate unchanged at 5.50%, which was widely expected by economists, but nudged higher its expected track for the OCR, saying it remains concerned about domestic inflation pressures and capacity constraints within the economy.
"We expect that the OCR will need to remain at a restrictive level for longer than assumed in the February statement, in order for inflation to return to the 2 percent target midpoint," the RBNZ said.
"The higher outlook for the OCR than in the February statement reflects the higher starting point for non-tradables inflation and capacity pressures, as well as a higher medium-term outlook for tradables inflation based on higher import prices," it added.
The New Zealand dollar jumped by half a U.S. cent after the statement.
"We have limited upside room for inflation surprises...We need to win the day," RBNZ Governor, Adrian Orr, told reporters after the release of the statement.
The RBNZ's OCR track now shows a peak of 5.65% by the end of this year, up from 5.6%, and implies it won't be cut interest rates until around August 2025 at the earliest, about three months later than implied in its February forecasts.
"It's more hawkish than what the markets had expected. The RBNZ is putting less weight on the softer data than most expected," said Sharon Zollner, chief economist at ANZ.
New Zealand's farm-rich economy has been in a sustained recession over the last year, with unemployment rising sharply in the first quarter.
Write to James Glynn at james.glynn@wsj.com
(END) Dow Jones Newswires
05-21-24 2353ET
