Reserve Bank Governor Adrian Orr says there's limited headroom to absorb additional inflation surprises

Another increase to the Official Cash Rate (OCR) is not necessarily more likely than not even though the Reserve Bank raised its outlook for the OCR in Wednesday's Monetary Policy Statement, Governor Adrian Orr says.

As expected, the Reserve Bank held the OCR at 5.50%, but surprised Reserve Bank watchers by increasing the OCR track to 5.69% by September 2024 from 5.59%.

Asked in a media conference whether this implies another OCR increase is more likely than not, Orr said no.

"No, we retain optionality throughout. We are showing an upward bias to the interest rate, but it's not a probability, yes or no. That is the pricing of markets saying 'we're not sure, is it 50/50, is it more than that or not'," said Orr.

"Why do we have an upward bias to our inflation projection? Because we need to balance the risks to meeting our remit...the risk to inflation in this country is still on balance more to the upside than down relative to our outlook."

"Let me be clear; inflation is declining. Where we are nervous is, is it declining fast enough for us to succeed in the lowest cost fashion to the rest of the economy? When we start from a very elevated level of consumer price inflation, we have limited headroom to absorb additional inflation surprises. We have a lot more headroom to absorb disinflation surprises from this point, and that's the reflection we're giving," Orr said.

"We have been projecting for some time now to be at least holding the Official Cash Rate at these levels through calendar next year."

The annual inflation rate, as measured by Statistics NZ's Consumers Price Index, dropped to 5.6% as of the September quarter, from 6.0% in June 2023 and a peak of 7.3% in June 2022. The Reserve Bank's remit has it targeting inflation between 1% and 3%. The Reserve Bank is, for now, also required to target maximum sustainable employment. Unemployment rose to 3.9% as of the September quarter, up from 3.6% in June and the low point of 3.2% in September 2022.

"Forward-looking indicators of the labour market suggest further easing is likely at the end of 2023, although demand for labour is mixed across industries," the Reserve Bank said.

Orr said the Reserve Bank was "to an incredible degree" trying to lean against the market and push back at banks reducing mortgage rates.

"I would say we have an incredible influence over the level of borrowing rates in the New Zealand monetary circle, and we are saying that they need to be at this height for a long time to come. If banks want to take risk and bet against it otherwise or not, that's their competitive desire. We know what we're doing," Orr said.

The Reserve Bank started increasing the OCR from tis record low of 0.25% in October 2021. It has held it at 5.50% for four straight reviews now, since a 25 basis points increase in May this year.

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