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The Reserve Bank of New Zealand (RBNZ) held the official cash rate steady on Wednesday but said inflation was still too high and additional policy tightening may be required.

The central bank kept the official cash rate (OCR) at 5.5% as forecast, but the statement’s hawkish tone drove the New Zealand Dollar and bond yields higher.

Although the RBNZ said it remained confident the current rate level was restrictive, price pressures and ongoing demand were concerning, taking into account the increased core inflation level.

“If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further,” the central bank said in a statement.

The Kiwi Dollar rose 0.8% to $0.6187 following the announcement, whilst two-year swap rates increased 12 basis points to 5.205% and bank bill futures edged down 7 ticks, Reuters reports.

“The hawkish tilt comes despite recent data that on balance has gone the RBNZ’s way,” according to ANZ economists.

“But there does appear to be genuine concern that the bulk of the transmission of monetary policy is now in the rear-view mirror, and core inflation and inflation expectations have not responded as hoped,” ANZ said.

The central bank hiked its forecast cash rate peak to 5.7%.

“Interest rates will need to remain at a restrictive level for a sustained period of time so that consumer price inflation returns to target and to support maximum sustainable employment,” the bank’s statement said.

This is the first RBNZ rate decision since the country elected a new government last month, headed by Prime Minister Christopher Luxon.

Earlier this week, the government said it would begin the legislative process to return the RBNZ to a single inflation-targeting mandate in its first 100 days in office, the Reuters report adds.

This shift would remove the requirement for the central bank to consider employment when establishing the cash rate and place the focus on inflation.

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  • OCR

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