The Reserve Bank (RBNZ) has hiked the Official Cash Rate (OCR) to 2.5% from 2.0% and says it's "resolute" in its commitment to get inflation down and back into its targeted 1% to 3% range.
The 50 point rise was widely expected and follows 'double jump' increases in the OCR in both April and May. The OCR has been pushed up some 225 points now since the start of this hiking 'cycle' in October 2021. Prior to that the OCR had been on the emergency setting of 0.25% since March 2020 and the start of the pandemic.
Economists had been expecting that the RBNZ would produce another 'hawkish' statement that keeps the pressure on regarding the RBNZ's efforts to dampen down inflation expectations.
Key parts of Wednesday's statement from the RBNZ Monetary Policy Committee were largely unchanged from its previous OCR decision in May - which of course also saw a 50 point OCR rise.
Crucially, the statement said "it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and support maximum sustainable employment".
Use of the term "at pace" as well as later "briskly" will be of interest in the marketplace, since this will reaffirm the view that the RBNZ will likely again increase the OCR by 50 points at the next review as well, in August.
ASB chief economist Nick Tuffley and economist Nathaniel Keall said the key question from here remains when the RBNZ will be able to have confidence it is getting closer to meeting its targets.
"While we expect annual CPI inflation peaked in Q2 [the June quarter] just north of 7%, it is still far from clear when it will settle back into the RBNZ’s 1-3% target band. Our research shows there is some risk that inflation is set to become more persistent in the NZ economy, particularly if the labour market remains tight. For now, we see the OCR heading to a peak of 3.5% in late 2022, with cuts to follow in 2024. That said, there may be some difficult trade-offs next year as growth slows but inflation potentially proving persistent," they said.
ANZ chief economist Sharon Zollner and senior strategist David Croy said Wednesday’s decision to raise the OCR by 50bps to 2.5% was straightforward, in that it was consistent with the RBNZ’s previous published forecast, analyst forecasts, and market pricing. "The path of least resistance was a motorway," they said.
"However, decisions are likely to get harder over the second half of the year as evidence mounts that tightening financial conditions are indeed dampening demand – and eventually inflation pressures – in the economy. The debate around 'how much is too much?' will naturally get much louder. But that remains an issue for another day, with it remaining unclear whether inflation has even peaked, let alone how quickly it will come down,” Zollner and Croy said.
The latest announcement from the RBNZ did not include a full Monetary Policy Statement. The last one of those was issued in May, while the next one will be in August. Therefore the central bank has not updated the economic forecasts it made in its May announcement, which included forward projections suggesting the OCR would be hiked to about 4% by the middle of next year.
However, in the summary of Wednesday's meeting of the Monetary Policy Committee, it is stated that the committee "remains broadly comfortable with the projected path of the OCR outlined in the recent May Monetary Policy Statement".
The committee noted that while there are near-term upside risks to consumer price inflation, there are also medium-term downside risks to economic activity.
"Despite these risks, members agreed that capacity pressures remain pervasive. Labour shortages continue to be a major constraint for business activity, as are the ongoing impacts of global supply chain disruptions. A resurgence in Covid-19 cases and a rise in other seasonal illnesses continues to constrain productive capacity in New Zealand. The recent removal of travel restrictions have also enabled a net outflow of labour in the near-term. Members agreed that employment is above its maximum sustainable level, and that rising wage pressure remains an expected outcome. Meanwhile, core inflation measures are around 4%," the statement from the committee said.
This is the statement from the Reserve Bank:
The Monetary Policy Committee today increased the Official Cash Rate (OCR) to 2.50 percent. 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 level of global economic activity, combined with the ongoing supply disruptions largely driven by both COVID-19 persistence and the Russian invasion of Ukraine, continue to generate global inflation pressures. Food and energy prices are especially affected by geopolitical tension. However, the pace of global economic growth is slowing. The broad-based tightening in global monetary and financial conditions is acting to reduce spending growth. Asset prices have also declined due to higher interest rates and a weaker earnings outlook.
In New Zealand, domestic spending remains supported by high employment levels, resilient household balance sheets in aggregate, continued fiscal support, and a strong terms of trade. The reduction in COVID-19 health-related restrictions is also enabling increased demand. Labour and resource scarcity are also contributing to upward price pressures which are currently exacerbated by seasonal illness, a resurgence in COVID-19 cases, and a net outflow of labour abroad.
In these circumstances, spending and investment demand continues to outstrip supply capacity, with a broad range of indicators highlighting pervasive inflation pressures. Employment remains above its maximum sustainable level and the Reserve Bank’s core inflation measures are around 4 percent. The Committee acknowledged there is a near-term upside risk to consumer price inflation and emerging medium-term downside risks to economic activity.
The Committee agreed to continue to lift the OCR to a level where it is confident consumer price inflation will settle within the target range. The Committee is comfortable that the projected path of the OCR outlined in the recent May Monetary Policy Statement remains broadly 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.
Summary of Monetary Policy Committee meeting:
The Monetary Policy Committee discussed developments affecting the outlook for inflation and employment in New Zealand. Members agreed that developments were broadly in line with their assessment at the May Monetary Policy Statement. 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 judged that the global economic outlook has continued to weaken, broadly as anticipated. The weaker outlook reflects a tightening of financial conditions, ongoing global supply disruptions, and rising geopolitical tensions. The Russian invasion of Ukraine continues to cause disruption to the supply of oil, gas and food commodities, resulting in continued high prices for food and energy. Ongoing health restrictions are exacerbating supply disruptions, as currently most notable in China.
Globally, many central banks have increased policy rates in response to rising inflationary pressures, to realign economic demand with supply. Members agreed that global inflationary pressures will likely persist in the near-term, as reflected in ongoing high domestic import prices and elevated shipping costs.
Members noted that the New Zealand dollar exchange rate has depreciated since the May Monetary Policy Statement. A moderation in global commodity prices, amid a continued decline in investor risk appetite, and rising central bank policy rates globally have contributed to this depreciation. The Committee noted that the weaker New Zealand dollar is continuing to have an impact on New Zealand dollar import prices.
In New Zealand, GDP contracted modestly in the March 2022 quarter. However, these data remain volatile, with a catch-up in government spending and exports expected. Increased visitors to New Zealand are also supporting hospitality and tourism. Meanwhile, household spending has remained resilient despite a decline in consumer confidence.
Financial conditions have continued to tighten with mortgage rates rising in response to, and in anticipation of, increases to the Official Cash Rate (OCR). Asset prices, including house prices, continue to decline. Members agreed that the increase in mortgage interest rates will assist to bring house prices more in line with sustainable levels. The Committee also agreed that both high food and energy costs and rising mortgage interest rates will lead to more subdued household discretionary spending in coming quarters.
Members noted that while there are near-term upside risks to consumer price inflation, there are also medium-term downside risks to economic activity. Despite these risks, members agreed that capacity pressures remain pervasive. Labour shortages continue to be a major constraint for business activity, as are the ongoing impacts of global supply chain disruptions. A resurgence in COVID-19 cases and a rise in other seasonal illnesses continues to constrain productive capacity in New Zealand. The recent removal of travel restrictions have also enabled a net outflow of labour in the near-term. Members agreed that employment is above its maximum sustainable level, and that rising wage pressure remains an expected outcome. Meanwhile, core inflation measures are around 4 percent.
The Committee discussed the unique shocks the economy is currently facing relative to historical experience. These developments increase the uncertainty about how households and firms will respond to a tightening of monetary policy. The Committee agreed that observing how households and firms are responding to these economic challenges will be important to understanding when monetary policy settings will be sufficient to achieve its remit objectives.
The Committee agreed to maintain its approach of briskly lifting the OCR until it is confident that monetary conditions are sufficient to constrain inflation expectations and bring consumer price inflation to within the target range. The Committee remains broadly comfortable with the projected path of the OCR outlined in the recent May Monetary Policy Statement. Once aggregate supply and demand are more in balance, the OCR can then return to a lower, more neutral, level. The Committee viewed this strategy as consistent with achieving their primary inflation and employment objectives without causing unnecessary instability in output, interest rates and the exchange rate.
On Wednesday 13 July, the Committee reached a consensus to increase the OCR to 2.50 percent.
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