11 Jul 2022

'This is their way of trying to restrain economic growth': OCR likely to rise to 2.5 percent

2:31 pm on 11 July 2022

The Reserve Bank is set to make it three in a row this Wednesday - a half a percentage point increase in the official cash rate (OCR) in a replay of its May decision.

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The 50 basis point rise will take the OCR to 2.5 percent, and will be accompanied by only a brief statement of explanation.

But the reasons for the rise are familiar and need no rewording, with inflation at a 30 year high of 6.9 percent, and likely to head higher, a red hot labour market, surrounded by a host of Covid-19 and Ukraine war related supply chain disruptions.

Kiwibank chief economist Jarrod Kerr said it was the Reserve Bank's way of trying to restrain economic growth and get inflation back down to 2 percent.

The main development since the last statement in May has been the slump in business and consumer confidence, he said.

"That points to interest rate rises to date and the expectation of more to come are really having an influence on businesses and households."

A 50 basis point rise would be the third in a row, the sixth rate rise since October last year, and the steepest and quickest climb in the OCR's 23-year history.

Kerr discounted a 75 basis point rise, as some of the more excitable commentators toyed with for a while, but he expected the OCR to reach 3.5 percent by end of the year.

Cannot afford to slacken the place

ASB economist Nathan Keall said the RBNZ would have to acknowledge that the economic negatives have continued to mount, but also their determination to win the inflation fight.

"They have to emphasise that doing 'too little, too late' in terms of tightening is still a bigger risk than 'too much, too soon.' Trotting out the word 'resolute' in relation to the Bank's commitment to price stability will be another signal that getting inflation back on track is still priority number one."

The RBNZ's last forecasts pointed to the OCR at 3.5 percent at the end of the year, implying another 50 basis point rise in August followed by two 25 basis points hikes in October and November.

Keall said he expected next year's rises would not be needed - although the RBNZ would not admit that - because the economy would likely have slowed enough and inflation would be showing sufficient signs of heading back under control.

But the question increasingly asked was what economic price will be paid for the RBNZ's battle for inflation fighting credibility and success, with talk of the risk of recession or a "hard landing" bandied around more frequently.

Westpac acting chief economist Michael Gordon said: "If the RBNZ did become concerned about the risk of recession, it has a very powerful tool at its disposal: it could stop.

"But doing that now would risk undermining the work that the RBNZ has done to bring inflation pressures under control. For that reason, we think that for now the RBNZ will carry through with the OCR tightening path that it laid out in May, without bowing to the speculation about recession risks."

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