RBNZ raises official cash rate by 25bp
The Reserve Bank of New Zealand lifted the official cash rate (OCR) yesterday by a quarter of a percentage point for the second month in a row, boosting it to 0.75 per cent.
It is one of the first central banks to start tightening monetary policy since COVID-19 started and is forecasting interest rates will continue to rise as it attempts to rein in inflation.
“The move was widely expected, although we and the market also saw a meaningful risk of a 50 basis point (bp) hike,” says Michael Gordon, acting chief economist at Westpac New Zealand.
“The RBNZ acknowledged that the strength of recent data made a case for a larger move. But the deciding factor was uncertainty around how spending and investment would hold up as the country moved towards living with COVID-19.”
Sharon Zollner, chief economist at ANZ New Zealand, says the RBNZ indicated that it thinks it has a lot more work to do yet. Its published OCR track shows that as things stand, it sees the OCR reaching 2.6 per cent by about the end of 2023, about 50bp more tightening than foreseen in August.
“This track implies a couple more hikes than we expect will actually prove necessary, but there’s an awful lot of water to flow under the bridge between now and then,” she says.
Nick Tuffley, chief economist at ASB, adds that the RBNZ acknowledged key medium-term supports to the outlook.
“These include household and business balance sheet strength, ongoing fiscal policy support, and strong terms of trade. This has increased the RBNZ’s confidence that economic activity will recover quickly as alert level restrictions ease.
“However, the RBNZ emphasised that with a global pandemic still around, the outlook is still inherently uncertain and fluid. Importantly, the RBNZ will be watching closely how the economy adjusts to the ongoing disruption from COVID-19.”
Indeed, in its comments, the RBNZ Monetary Policy Committee said the further removal of monetary policy stimulus was expected over time given the medium-term outlook for inflation and employment.
It noted that global supply-chain disruptions were causing both cost pressures and constraints on production, at a time when consumer demand remains strong.
It added that central banks globally faced the challenge of distinguishing between transitory price increases and underlying sustained inflation pressures to assess the need for, and timing of, reductions in the level of monetary policy stimulus.
The RBNZ said headline CPI inflation was expected to measure above 5 per cent in the near term before returning towards the 2 per cent midpoint over the next two years.
The near-term rise in inflation, it said, was accentuated by higher oil prices, rising transport costs and the impact of supply shortfalls. These immediate relative price shocks risk generating more generalised price rises given the current domestic capacity constraints.
The committee added that the economy was expected to recover as public health restrictions were eased as the country moved into the COVID-19 Protection Framework. However, it had also discussed the risk of consumer and business confidence weakening as COVID-19 became more widespread across the country, dampening household spending and investment in the near term.