RBNZ hikes rates to 1.5% on inflation concerns

  • By Zilla Efrat

The Reserve Bank of New Zealand’s monetary policy committee yesterday hiked the official cash rate (OCR) by 50 basis points to 1.5 per cent. It also noted that the current level of the OCR was still stimulatory and that further increases would be needed to achieve its mandate.

“The increase was larger than the majority of economists (including us) were expecting but was more in line with what financial markets had priced in,” says Michael Gordon, acting chief economist at Westpac NZ.

“The RBNZ reiterated that its key concern is that the current spike in inflation doesn’t become embedded in longer-term price-setting behaviour.”

Gordon describes the RBNZ statement as very much focused on explaining yesterday’s decision rather than providing a signal for upcoming reviews. “That said, there was nothing in the statement that explicitly argued against a follow-up 50 basis point hike in May, so we wouldn’t be surprised if the market moves to fully price that in.”

Mark Smith, a senior economist at ASB, says it was clear that the OCR needed to go up, but views were split on how much. “The RBNZ hiked by 50 basis points citing the least regrets motivation, with a ‘stitch in time’ approach needed to best maintain price stability and support maximum sustainable employment.”

He says the RBNZ is clearly worried about the (upwardly revised) near-term inflation outlook and the risk that inflation expectations stray from the inflation target. 

“Importantly, however, the RBNZ did not employ forward guidance on future OCR levels, with the bank also concerned over the global outlook and noting the tightening in New Zealand financial conditions of late and in the pipeline.”

ASB has now revised up its OCR forecast view and expects a 50 basis point hike in May, followed by a sequence of 25 basis point hikes to a 3.25 per cent OCR peak this cycle.

“Pre-emptive OCR hikes will reduce the need for hikes further down the track,” says Smith.

“We have changed our OCR outlook and expect the RBNZ to swiftly move the OCR to circa 2 per cent neutral levels in May (i.e. 50 basis point hike), followed by a sequence of 25 basis point hikes to a 3.25 per cent OCR peak this cycle.”

Meanwhile, ANZ Bank New Zealand yesterday announced it would increase the interest rates on some lending and savings accounts following RBNZ’s move.

The ANZ Home Loan Floating interest rate and ANZ Flexible Home Loan interest rate will go up 0.50 per cent to 5.54 per cent pa and 5.65 per cent pa respectively. Business floating and business overdraft base rates will also go up 0.50 per cent pa.

Interest rates will also increase on a number of other savings, fixed rate home loans, and term investment products.

ANZ managing director for personal banking Ben Kelleher says the OCR was only one of a number of factors, including wholesale interest rates, that determined bank lending rates.

“The global economic response to Covid-19 and geo-political issues, like the war in Ukraine, are driving inflation to levels not experienced in decades.”