Most NZIER shadow board members support keeping the New Zealand interest rate at 2.25% in May (statement due at pm NZT on May 27), citing weak growth and uncertainty over the Iran war, although all agreed rates should rise over the next year.
summary:
Source: NZIER Shadow Monetary Policy Board
- A majority favor keeping interest rates at 2.25% in the next May monetary policy statement, citing weak growth, spare capacity and ongoing uncertainty from the US-Israel war with Iran.
- Three members say monetary policy tightening should start now, noting that the real interest rate has remained low or negative for too long and inflation pressures are rising.
- All members agree that the OCR rate should be higher in twelve months, with most clustered around the 2.75% to 3.75% range.
- Those who favor Remain emphasized that the oil price shock was supply-driven, not demand-driven, with unemployment trending toward 5.6% and fourth-quarter GDP growth at just 0.2%.
- Hawks on the Governing Council warned that delaying action could lead to low real interest rates becoming entrenched and allowing inflation to take hold in the second round.
A majority of members on NZIER’s shadow monetary policy board recommended the Reserve Bank of New Zealand keep the official policy rate at 2.25% in its next May monetary policy statement, although the outcome masks a tangible split of opinion on how long the pause could last.
Those who favored no change cited a combination of weak domestic conditions and external uncertainty. The New Zealand economy maintains excess capacity, GDP growth was just 0.2% in the last quarter, and unemployment is heading towards 5.6%. Significantly, several members said that current inflation pressure is being driven by volatile oil and electricity prices, products of the US-Israel war with Iran, rather than any rise in domestic demand. They claimed that tightening in this environment risks causing unnecessary harm.
Three members disagreed, demanding the immediate start of the tightening cycle. Their case was based on the observation that the true OCR rate had been at or below zero for a long period, a setting that was calibrated for very different inflation conditions. With headline CPI, non-tradable inflation and two-year inflation expectations at or above the top half of the 1% to 3% target range, some members said the case for acting now was already clear. One described the immediate increase as a down payment to return the OCR rate to more neutral levels in the 3% to 3.5% range.
The outlook produced broader agreement. All Shadow Councilors expect the OCR rate to be higher in twelve months, with the majority focusing on a range of 2.75% to 3.75%. The debate is less about direction and more about timing, with data-driven members preferring to wait for clearer signals from forward-looking indicators over the coming weeks before committing to a course.
The Shadow Council’s release comes ahead of the Reserve Bank of New Zealand’s decision on 27 May, providing a structured outside read on where informed market and academic opinion stands.
2pm New Zealand time on the 27th is:
- 0200 GMT on the 27th
- 2200 EST on the 26th
