RBNZ lifts cash rate to 1%

  • By Zilla Efrat

As widely expected, the Reserve Bank of New Zealand raised the official cash rate 25 basis points to 1 per cent yesterday.

Its monetary policy committee indicated that there could be more increases this year to avoid “longer-term inflation expectations rising above the target and becoming embedded in future price setting”.

The committee considered lifting the OCR by 50 basis points but settled at 25 basis points instead, after noting that interest rates had already increased significantly late last year and were expected to continue rising.

However, it said it was willing to move the OCR in larger increments if required over the coming quarters.

The committee also agreed to start the gradual reduction of the RBNZ’s bond holdings under the Large Scale Asset Purchase (LSAP) program, through both bond maturities and managed sales.

The committee noted that the level of global economic activity was generating rising inflation pressures, exacerbated by ongoing supply disruptions.

“Headline CPI inflation is well above the RBNZ’s target range but will return towards the 2 per cent midpoint over coming years,” it said.

“The near-term rise in inflation is accentuated by higher oil prices, rising transport costs, and the impact of supply shortfalls. These immediate relative price movements risk generating more generalised price rises, especially given the current domestic capacity constraints.”

“The RBNZ was more hawkish than generally expected,” says Nick Tuffley, chief economist at ASB Bank.

“The monetary policy statement showed a need to lean much harder against inflation than was the case for the November statement and expressed some added concern about the risk of high inflation becoming embedded.”

Tuffley says ASB Bank retains its view that the RBNZ will steadily lift the OCR in consecutive 25bp moves to a peak of 2.75 per cent – 175 basis points higher than the current level. 

However, based on yesterday’s statement, he acknowledged that the skew of risks was on the high side of that. “Market pricing is starting to back away from the ‘considered steps’ mantra and is factoring in the possibility that the RBNZ delivers more than ‘just’ 25bp moves at the next six meetings of 2022.”