13 Apr 2022

Reserve Bank lifts OCR to 1.5 percent

5:56 pm on 13 April 2022

The Reserve Bank (RBNZ) has stepped up the battle against inflation with an increase of half of a percentage point in the Official Cash Rate (OCR) to 1.5 percent, with a warning that further rises are coming.

File image: Governor of the Reserve Bank Adrian Orr. Photo:

The rise had been expected and it is the first time since early 2000 that the central bank has raised by such an amount.

The Monetary Policy Committee said the RBNZ needed to move more quickly to get inflation - which is at a 30 year high - back to its 2 percent target.

"Moving the OCR to a more neutral stance sooner will reduce the risks of rising inflation expectations. A larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic environment," it said in a statement.

Economists described the decision as a toss of the coin between 25 and 50 basis points, as the central bank confronts inflation expected to go past 7 percent next week, a strong labour market with record low unemployment, a slowing housing market, and prices and supply chains disrupted by Omicron and the Ukraine war.

"The level of global economic activity continues to generate rising inflation pressures, exacerbated by ongoing supply disruptions in large part driven by Covid-19.

"The Russian invasion of Ukraine has significantly added to these supply disruptions, causing prices to spike in internationally traded commodities and energy."

The Committee said the economy had underlying strength, sound finances, and strong export earnings, but inflation and uncertainty were denting consumer confidence.

"The Committee will remain focused on ensuring that current high consumer price inflation does not become embedded into longer-term inflation expectations."

The RBNZ started raising the official cash rate in October last year, with further hikes in November and February this year as it ended its easy money policies which pumped billions of dollars at rock bottom rates to support the financial system when Covid hit in 2020.

The bank's forward projections in February pointed to steady rate rises this year through to 2 percent, with further hikes next year.

Better late than never

Economists had seen the decision as a toss of the coin, so were not surprised by the size of the hike, although Brad Olsen of the Infometrics consultancy said the RBNZ had arrived "fashionably late" to finally battle inflation.

"Today's move is a decisive one that puts a shot across the bows of businesses and aims to stop inflation expectations becoming more unanchored. Everyone is on notice that the Bank is willing to make bigger, and possibly unpopular, moves to tame the inflation dragon."

Kiwibank chief economist Jarrod Kerr said the RBNZ clearly had the bit between its teeth and could be expected to press on assertively with more rises this year.

"We now expect the RBNZ to deliver another 50bp move in May to a 'neutral' setting of 2 percent. But the RBNZ won't stop there. We expect the RBNZ to hike to 3 percent by November."

He said the central bank had more work to do to rein in inflation and better balance the economy, and the aggressive approach was likely to accelerate the decline in house prices as interest rates were ratcheted higher, faster.

Kerr told Checkpoint he was worried about the impact on households as the RBNZ took a "sledgehammer" to inflation.

He did not think RBNZ needed to move so hard.

"We've seen a drop in consumer confidence and we've seen a drop in business confidence which worries me, but they have decided that they want to get on top of inflation and inflation expectations."

CoreLogic chief economist Kelvin Davidson said mortgages were headed higher as a result.

"Many 'special' fixed-rate mortgages in the popular 1-2 year terms are currently in the range of 4-5 percent, and it seems fair to suggest that this could end up in the range of 5-6 percent over the coming months, perhaps a bit above."

About half of current mortgages were up for renewal in the coming year and facing higher payments, but he did not think a hard landing in the property market was looming.

"With unemployment low and ability to repay having been tested at higher interest rates anyway, we think conditions are still in place for a 'soft landing' rather than serious downturn."

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