More Tough Love from RBNZ as Rates Go Up Again

By Glenn Dyer | More Articles by Glenn Dyer

They are not mucking about bashing inflation lower in New Zealand as the country’s Reserve Bank revealed the second 0.50% increase in the official cash rate (OCR) in a row, raising it to 2%, the highest it has been for six years.

It was the fifth straight rate hike from the Reserve Bank of NZ, as inflation remains persistently high across the Tasman at an annual 6.9%.

In a statement announcing the decision the RBNZ made it clear it would go on lifting the cash rate until inflation was tamed, even if that puts a recession on the agenda by crimping demand to take the heat out of spending.

Governor Adrian Orr made it clear what the central bank is aiming to do in this quote “Without doubt, we need to slow the growth in demand.”

The Reserve Bank is now predicting the OCR will need to climb to about 3.4% by the end of this year, peaking at 3.9% from June next year.

As the bank tends to move the OCR in increments of 25 basis points, that implies a high chance of the rate topping out at 4%.

Before Wednesday’s statement, the RBNZ had been forecasting the OCR would stay below 3% until mid 2023 and peak at about 3.4% in 2024.

Reserve Bank is forecasting the OCR will start falling towards the end of 2024.

It expects house prices will fall 14% from their November peak, by 2024, with about a third of the decline have already occurred.

The Reserve Bank is forecasting the economy will keep growing every quarter, but Orr said a recession “sat within a range of possible outcomes, of course it does”.

“The Committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and support maximum sustainable employment.

“The Committee is resolute in its commitment to ensure consumer price inflation returns to within the 1 to 3 percent target range,” the key most hawkish part of the statement read.

“A larger and earlier increase in the OCR reduces the risk of inflation becoming persistent, while also providing more policy flexibility ahead in light of the highly uncertain global economic environment.

“The level of global economic activity is generating rising inflation pressures, exacerbated by ongoing supply disruptions driven by both COVID-19 persistence and the Russian invasion of Ukraine. The latter continues to cause very high prices for food and energy commodities.”

The tone of the statement was full on so far as the economy generally being too strong to cool with smaller rate increases.

“On balance, a broad range of indicators highlight that productive capacity constraints and ongoing inflation pressures remain prevalent. Employment remains above its maximum sustainable level, with labour shortages now the major constraint on production. The Reserve Bank’s core inflation measures are above 3 percent.

“The Committee agreed to continue to lift the OCR at pace to a level that will confidently bring consumer price inflation to within the target range.

“The Committee viewed the projected path of the OCR as consistent with achieving its primary inflation and employment objectives without causing unnecessary instability in output, interest rates and the exchange rate.

“Once aggregate supply and demand are more in balance, the OCR can then return to a lower, more neutral, level.”

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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