17 Aug 2022

Reserve Bank raises OCR to highest level in seven years

6:39 pm on 17 August 2022

The Reserve Bank has raised the official cash rate (OCR) to a seven-year high and signalled more rises until it gets inflation under control.

Governor of the Reserve Bank Adrian Orr.

Governor of the Reserve Bank of New Zealand Adrian Orr Photo: RNZ / Dom Thomas

The benchmark rate was raised, as expected, by 50 basis points - half a percentage point - to 3 percent.

The monetary policy committee (MPC) said the economy was still performing strongly, the labour market remained tight, and households were in good financial shape.

However, it reaffirmed its hawkish approach to tackling inflation, currently at a 30-year high of 7.3 percent.

"It remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and contribute to maximum sustainable employment," the MPC said in a statement.

"Core consumer price inflation remains too high and labour resources remain scarce."

The MPC pointed to domestic drivers of inflation, including the tight labour market.

"Production is being constrained by acute labour shortages, heightened by seasonal and Covid-19 related illnesses. In these circumstances, spending and investment continues to outstrip supply capacity, and wage pressures are heightened. A range of indicators highlight broad-based domestic pricing pressures."

It said the economy was being supported by domestic spending, sound household finances, strong exports, and broad government spending.

It said global inflation was still being driven by a wide range of factors, including Covid-19-related supply chain disruptions and the Ukraine war, although it noted the recent fall in world oil prices.

The MPC's forecasts pointed to cash rate rises likely in October and November at least to 3.75 percent by the end of the year and pushing possibly as high as 4.25 percent by the middle of 2023, with little prospect of rate cuts before late 2024, when inflation was expected to return to the target 1-3 percent target band.

The New Zealand dollar gained about a quarter of a cent against the US dollar on the RBNZ's continued hawkish tone.

As expected

Economists said the RBNZ had stuck to the script and, as expected, delivered another hawkish statement.

A top of 4 percent for the OCR was expected as likely to be the new maximum, albeit opinion was divided on how it would be delivered.

ANZ chief economist Sharon Zollner said it would come in 50 basis point hikes in October and November, with an outside chance of a smaller rise early next year.

"With domestic inflation not yet showing any signs of easing, and the nominal economy inflating, the RBNZ can't afford to let up with interest rate hikes."

But ASB chief economist Nick Tuffley said the RBNZ was now getting to the point where it needed to pay greater attention to the economic numbers coming through, and he expected a 50 basis point rise in October and 25 basis point rises in November and February next year.

"Those later two meetings are the fine-tuning part of the tightening cycle, so whether or not a final move to 4 percent happens will be down to whether there is any tempering in the RBNZ's inflation outlook over late 2022/early 2023."

RBNZ Governor Adrian Orr said house prices had fallen to more sustainable levels, and the fall in prices from the peak of the market last year to its trough would be close to 20 percent, although he expected borrowers should be able to cope with the higher rates that have occurred and may yet be to come.

Property research firm CoreLogic senior economist Kelvin Davidson said he did not expect much of a pass through of the latest OCR rise into mortgage rates.

"The upwards path for the OCR has already been 'priced in' to current mortgage rates, at least the shorter term fixes ... (and) with fewer property transactions taking place - hence less new lending - there's a lot of focus in the banking sector on existing borrowers and keeping market share."

A second term?

Orr batted away questions on whether he would seek a second five-year term when his current contract expires next year, saying he "didn't want to talk about it".

He noted recent criticism of the RBNZ and other central banks for the way they had handled the pandemic with ultra-loose monetary policies at the beginning, which have been blamed for stoking house and other asset prices as well as fuelling inflation, and then a slow response to unwinding those policies.

Orr said the RBNZ had been "playing the cards that are in your hand at the time, as best as you can", but said the central bank had engaged two international consultants with central bank experience to review its actions and policies.

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