The Reserve Bank (RBNZ) has raised the Official Cash Rate by 50 basis points to 3.5% - but appears to have come very close to making a bigger hike.
It is the fifth consecutive 50 point rise as the RBNZ attempts to get on top of inflation that hit an annual rate of 7.3% in the June quarter.
The OCR is now at its highest level in over seven years, while the five consecutive 50 point rises are unprecedented.
But in what was quite a 'hawkish' statement the RBNZ said its Monetary Policy Committee had given serious consideration to hiking the OCR by 75 points this time around.
"Some members [of the committee] highlighted that a larger increase in the OCR now would reduce the likelihood of a higher peak in the OCR being required," the RBNZ said.
"Other members emphasised the degree of policy tightening delivered to date. Members also noted the lags in monetary policy transmission and a slow pass-through to retail interest rates. On balance, the committee agreed that a 50 basis point increase was appropriate at this meeting."
And in a further hawkish signal in the notes from the MPC meeting, the RBNZ said committee members noted the strong funding position of banks and that as a result, recent increases in wholesale interest rates "have yet to be fully reflected in retail interest rates".
"However, wholesale funding costs are rising and bank funding conditions are expected to become less accommodative. The Committee expects that higher wholesale interest rates will be reflected in higher retail interest rates, particularly deposit rates, as banks compete for funding."
Banks will likely see this as a green light for further rate rises sooner rather than later.
There was also reference to the NZ dollar, which has weakened considerably in recent weeks in the face of a very strong American currency.
The MPC noted that higher global interest rates and increased risk aversion in global markets "have placed downward pressure on the New Zealand dollar".
"Members believed that this would contribute toward a rebalancing of New Zealand’s current account over the long-term. However, a lower New Zealand dollar, if sustained, poses further upside risk to inflation over the forecast horizon."
After the OCR announcement was made the Kiwi dollar rose to about US57.75c from US57.3c prior.
The OCR has now been lifted some 325 basis points in the past 12 months, after being on an emergency setting of just 0.25% for about a year and a half after the onset of the pandemic.
The latest OCR review was not accompanied by a Monetary Policy Statement (MPS) - the next one of these will be issued on November 23 - so, the forecasts from the August MPS were not updated as such. Those forecasts (page 45) suggested an OCR peak of just over 4% by the middle of next. Significantly, the RBNZ made no reference at all to those forecasts.
That fact, plus other comments that were made in the RBNZ's statements on Wednesday would do little to dampen market speculation that a higher OCR than 4.0% will be needed.
More recently, the wholesale interest rate markets have been 'pricing in' a peak OCR of 4.75%. ANZ economists have forecast a 4.75% peak. Most other economists are leaning towards a top of 4.25%, though Westpac's economists recently raised their peak pick to 4.50%.
Westpac's acting chief economist Michael Gordon said the record of the MPC meeting was "unusually explicit" in noting that the committee debated between a 50 or a 75 basis point hike.
"The latter was argued on a ‘stitch in time’ basis: a larger increase now could reduce the risk of a higher peak in the overall OCR cycle. This suggests that the RBNZ is now eyeing a considerably higher peak than the 4.1% from its August projections," Gordon said.
"Today’s 50bp increase was widely expected, and the implicit signal of a higher OCR peak was broadly in line with what we expected. We recently revised up our OCR forecast to a peak of 4.5% by next February."
This is the statement from the Reserve Bank:
The Committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and contribute to maximum sustainable employment. Core consumer price inflation is too high and labour resources are scarce.
Global consumer price pressures remain heightened. The global demand for goods and services is exceeding supply capacity, putting upward pressure on prices. Food and energy prices are being particularly exacerbated by the war in Ukraine.
A recent decline in oil prices and an easing in some supply-chain constraints have seen headline inflation measures fall in some countries. However, core measures of inflation have risen and persist. Central banks are tightening monetary conditions, implying a weaker growth outlook for New Zealand’s trading partners.
In New Zealand, the level of domestic spending has remained resilient to date, in the face of slowing global growth and higher domestic interest rates. Employment levels are high, and household balance sheets remain resilient despite the fall in house prices.
New Zealand’s productive capacity is still being constrained by labour shortages and wage pressures are heightened. Overall, spending continues to outstrip the capacity to supply goods and services, with a range of indicators continuing to highlight broad-based pricing pressures.
Committee members agreed that monetary conditions needed to continue to tighten until they are confident there is sufficient restraint on spending to bring inflation back within its 1-3 percent per annum target range. The Committee remains resolute in achieving the Monetary Policy Remit.
Summary of Monetary Policy Committee meeting:
The Monetary Policy Committee discussed developments affecting the outlook for inflation and employment in New Zealand. Inflation is currently too high and employment is beyond its maximum sustainable level. The Committee agreed to continue increasing the Official Cash Rate (OCR) at pace to maintain price stability and support maximum sustainable employment.
The Committee discussed recent international economic developments. Inflation remains high globally. Headline inflation has declined slightly in some countries, but core measures of inflation have proved more persistent. Recent indicators suggest the global growth outlook has weakened, in part due to tighter global financial conditions. In Europe, the war in Ukraine continues to pose downside risks to growth and upside risks to inflation. In China, containment of COVID-19 continues to adversely impact activity and there are financial stresses emanating from the property sector.
The Committee observed that global sovereign bond yields have increased significantly, consistent with a repricing of expectations for central bank policy rates. Some members believed that simultaneous and fast-paced monetary tightening in multiple countries was increasing downside risks to global growth. Members noted that large movements in wholesale interest rates and exchange rates were causing a deterioration in financial market liquidity, which can exacerbate market volatility.
Higher global interest rates and increased risk aversion in global markets have placed downward pressure on the New Zealand dollar. Members believed that this would contribute toward a rebalancing of New Zealand’s current account over the long-term. However, a lower New Zealand dollar, if sustained, poses further upside risk to inflation over the forecast horizon.
The Committee discussed recent developments in the domestic economy. New Zealand GDP in the June quarter rebounded broadly as expected. This was supported by a resumption in international tourism following the reopening of New Zealand’s borders, and an increase in domestic activity following the relaxation of pandemic restrictions. Other more recent indicators suggest that domestic activity in the September quarter may have been slightly stronger than previously assumed. Consumption remains resilient overall, but spending on durable goods, which may be more sensitive to interest rates, has continued to decline.
Household balance sheets are resilient despite recent declines in house prices. Members agreed that falling house prices and declines in other asset prices will negatively impact household consumption. Members noted that household debt servicing costs were rising and had further to increase on average as more fixed-rate mortgages are reset at higher interest rates. The impact of higher debt servicing requirements are an important channel of monetary policy transmission.
The Committee noted recent survey data showed that for businesses, cost pressures and labour scarcity remain the primary concerns. The construction industry faces ongoing capacity constraints. Building consents remain near historic highs, driven by growth in multi-unit dwellings, although there is uncertainty about the construction pipeline going forward.
The Committee agreed that the labour market remains very tight. Net migration remains negative and is yet to provide any sustained recovery in external labour supply. Members discussed the likelihood of further upside wage pressure given lags in the wage setting process. Some members noted that there may be changes in wage setting behaviour in an environment of higher headline inflation.
The Committee discussed domestic financial conditions. Members noted the strong funding position of banks and that as a result, recent increases in wholesale interest rates have yet to be fully reflected in retail interest rates. However, wholesale funding costs are rising and bank funding conditions are expected to become less accommodative. The Committee expects that higher wholesale interest rates will be reflected in higher retail interest rates, particularly deposit rates, as banks compete for funding.
The Committee discussed the pace and extent of monetary tightening required. Members agreed that the OCR needed to reach a level where the Committee could be confident it was sufficient to maintain expectations of low inflation in the longer term and bring consumer price inflation to within the target range.
The Committee considered whether to increase the OCR by 50 or 75 basis points at this meeting. Some members highlighted that a larger increase in the OCR now would reduce the likelihood of a higher peak in the OCR being required. Other members emphasised the degree of policy tightening delivered to date. Members also noted the lags in monetary policy transmission and a slow pass-through to retail interest rates. On balance, the Committee agreed that a 50 basis point increase was appropriate at this meeting.
On Wednesday 5 October, the Committee reached a consensus to increase the OCR to 3.5 percent from 3 percent.
122 Comments
I would rather they "ftitter it away" on the health system" ie hospitals and nurses than tax cuts essentially for those earning over 70k. Dont forget NZ already has lower tax rates than England and OZ. National should tread carefully, a lot of voters are now at or approaching the age of needing hospitals and the like, they should be very careful with their proposed 'balancing'
"Dont forget NZ already has lower tax rates than England and OZ"
Are you sure about that tax rate comment? Taking into consideration exchange rate differences, someone earning $70k pays 20% tax in NZ, 12.8% tax in UK (on 35k pounds) and 17% tax in Oz ($62k AUD)
NZ is one of the few places in the OECD that taxes every dollar. UK you have equivalent of first $25k NZD tax free, Australia is c. $20k tax free.
Do you realise that "those at the top" pay tax on higher rates to begin with? Normally, one would expect a flat tax rate, so everybody pays the same share, meaning higher earners pay more in absolute terms but everyone pays an equal proportion.
However, we have a progressive system, which is unfair, as more productive people pay proportionally more tax, which creates a double-whammy for them. Taking away some of that unfairness does not mean "giving those at the top most benefit".
Please, do come to realise that socialism does not work. Having grown up behind the iron curtain, I know what I am talking about. The comeback of socialist ideas in the Western world is astounding. Learning from history would be beneficial.
What's unfair is that working Kiwis fund the bulk of society while most money has been made elsewhere and evaded tax simply by folk pretending not to have bought and sold for capital gains. I pay the highest tax rate and I'm tired of carrying freeloading speculators.
What's ironic is when older folk who in many cases received free education, cheap housing, and New Zealand's only universal welfare benefit thanks to others' taxes, are wont to shake their finger at younger people about "socialism!" It rings hollow when it's "socialism for me, own two feet for thee".
MisterB you have hit the nail on the head. The fact is every year that we do not have our tax system indexed to inflation mean EVERY YEAR we get an AUTOMATIC TAX INCREASE.
How can you justify a tax increase every year when you have a cost of living crisis?
I'm feeling the pinch..... Just look at boneless chicken for example, I used to be able to pick that up on SPECIAL for $8.99Kg. Now the special is $12.00 That's just one example. So thats an extra $5 just on meat for a meal. And what about all the ingredients that you add to it. All the basics have jumped in price by 20% in the last 12months.
Can't afford to buy my lunch at work because that's $15 per day now so now I make cheese toasties or bring a home made smoothie.
And I am on above the average wage but I am still struggling. Just look at KFC.... $30 for a 2person takeaway. And what about fish and chip shops? Near $10 for 1 fish and 1scoop of chips.
We don't buy takeaways anymore, we limit our travelling to save on petrol, we jump into bed with electric blanket on to save heating and then we get told that WE ARE RICH, well I'm sorry but I actually need a tax cut, and you know what? I won't fritter it away, but I would like the freedom to buy takeaways once a week and buy my lunch once a week if that's ok with MR Grant Robertson. And you know what..... It's not his money.... It's mine.
Government wastes money but does anyone mention that? You can't seriously say Govt is an efficient spender of my money. Anyone who works in Govt will tell you that.
It's all about what they spend the money on, and I don't think they are more efficient than I am about how my money is spent.
Fund the core services and that's it. Health, education and police. Everything else should be cut. And give me and every other New Zealander the right to spend my own money and not make me feel guilty about. Can I have my money please because I'm struggling under the New Zealand that LABOUR has created. Kia kaha te na koutou katoa naku noa na
With a ten-year bright-line test we do essentially have capital gains tax. It is not even inflation adjusted, which is grossly unfair. This is because much of the "capital gains" are merely artificial, as the purchase power of the Dollar decreases over time, due to money-printing.
We really do not need to look at bureaucratic European countries for higher GST rates. Our government is inept and inefficient enough in how it spends tax Dollars. They do not need to take away more from the common man, who would be most affected by GST increases.
No mention of GST (VAT)? That's basically a tax on income too, as it taxes what you spend (which you've already paid tax on, so effectively they take another bite of it because you decide to use it).
Not 100% sure of my maths, but assuming your bracket puts you in the 10.5% tax range (the lowest), if you spend all your income there is another 15% (GST) applied to all you spend making your effective tax rate around 24%. In the 17.5% bracket with the same conditions the effective tax becomes 30%, In the 30% bracket it is around 40%. Above that the impact becomes less due to the assumption that some savings can be achieved with a proportionate reduction of the effective tax rate.
My math; Assume your income = 1. At the imposed tax rate x, 1 - x = y, Y x 0.15 (GST) = z the additional tax component on your remaining income. x + z = E the effective tax rate.
Yes there are some gaps, and rent takes a disproportionate amount of a lot of people's incomes. Also I have ignored that someone earning say $80K is progressively taxed, that is they only pay 10.5% on the first $14k, 17.5% on the next and so on. But the entire point is GST or VAT cannot be ignored when talking about tax. and is entirely regressive and punitive on the lower income brackets. Politicians like to exclude it, because it makes them look less greedy, but ignoring it makes them liars.
I would also be happy if they "frittered it away" on front line services but they dont as its frittered away on lollies being handed out and restructuring
and govt expenditure is currently still inflationary which is not helpful at all
Rex Pat is right - but now just 12 months to go
You forgot the s*itshow that is the mega-merger of polytechs.
The CE of the new umbrella org went MIA for a while, staff unions were not consulted with at any stage of the merger, the management decided to reduce deficits by freezing recruitment even if that was for replacing leavers, and more on the long-running drama series.
Are the centralisation projects really pointless? Surely one health authority has better bargaining with suppliers, more reuse of IT, etc.
Same with water: Auckland spends close to a million a year on the CEO alone, multiply that by every council for no good reason.
Yea,I noticed when voting in the local body election,gone were the pages and pages of DHB hopefuls...I think the reduction of DHB's from the 20 odd we had is a good thing,less bureaucracy and hangers on...now for 3 waters to stop the little dysfunctional councils,most without the skills or knowledge to manage multi million dollar investments in our infrastructure.And lets stop the "they're stealing our assets" rubbish,they will be owned by the nation...and in most cases they are "stealing your debt"
And combine them into eight bureaucracies (four to deliver and four more to clip the ticket of co-governance) with little or no accountability to the customers and still lack the skills to operate and manage. Remember this post vman when you plan to dig a hole somewhere to repair the water lines and need to know where the location of the other utilities - power and broadband and land use data. The cost of merger IT systems of 67 councils will be over $1 Billion alone. Then there is the retraining and change management.
You obviously have no experience of the Super City merger. A godsend to faceless bureaucrats who love to spend other peoples more without accountability.
Looking at the state of many of our towns and city water/waste infrastructure,there are plenty local bureaucrats with zero skills already spending folks money without much accountability.Some Nigel Nobody gets elected on some council,suddenly he's in charge of multi million dollar infrastruture.
And with 3 waters for example you end up with some consistency of material spec across the board. At the moment you have:
Pipes being spec'd as upVC, mPVC, oPVC, Series 1, Series 2, HDPE, CLS, GRP. Hell, Napier has their own proprietary cast iron valve surface box. Hastings uses a different style. Wellington City Council insists on a different style to Hutt City Council.
The invisible hand is driving the economy, but we've put the hands in handcuffs GFC- now with dodgy monetary policy. The handcuffs may have broken last year and we may see the invisible hand do its work and restructure the economy where those that produce receive fair reward for their goods and services.
As opposed to 'capital invested and skilled people' (which could be landlord/property investor types) who have been economically rewarded for doing nothing for years and yet enriched in the process.
The free market/invisible hand will in time sort this out....and the harder central banks try to fight that force (which is like god and a person trying to avoid death) then the greater the struggle and the pain that our society will experience as a whole.
Agree. I've been telling my friends who think National has it in the bag that there is zero chance that come this time next year, National's tax policy will remain the same. With the increase to interest rates, you'll see the provisional tax forecast from the removal of interest deductibility skyrocket, and politically it's just not a hill they'll want to die on. No amount of polish will shine that turd.
Be interesting to see if it will be enough to prevent a slide below 0.50 against the USD over the next month or so. I'm not certain it will be. I think if the US equity markets turn south again, then the NZD will continue its slide. A higher risk premium for owning the NZD could be required above the strength of the USD.
At 5pm NZD/USD has fallen back close to where it was before the announcement.
The currency market was not impressed with today’s announcement of a $9.7 billion deficit in Crown Accounts for year ending 30 Jun 22. Since it is $10 billion better than Treasury forecast you would have expected an increase in the NZD/USD but there has hardly been a ripple.
The reason for the lack of enthusiasm for NZD Is that NZ’s current account deficit (Exports - Imports) of $27 billion for year ending 30 Jun 22 or $5k per person shows that NZ is living beyond its means. This deficit has to be funded from overseas cash inflows.
At 1 July 2021 NZD/USD was 0.7000. At 30 June 2022 NZD/USD had fallen by 8.9% (0.6225) andas of today has now fallen 18% (0.5745)
The drop in NZD shows an increasing lack of confidence in the NZ economy.
This is the real story. NZ’s wealth has dropped dramatically through excessive money printing & government spending.
The Reserve Bank of Property (aka the RBA) made the following statement in the last few minutes:
"Our sheep shagging friends at the RBNZ are mad raising rates by another 0.5%"
https://twitter.com/RBASHAGGER/status/1577467186058186752?s=20&t=jPX9Os…
On this theme, the Reserve Bank of Property (RBA) also clarified why they only raised their cash rate by 0.25 this week:
https://twitter.com/RBASHAGGER/status/1577171321485524993?s=20&t=jPX9Os…
Household balance sheets are resilient despite recent declines in house prices. Members agreed that falling house prices and declines in other asset prices will negatively impact household consumption. Members noted that household debt servicing costs were rising and had further to increase on average as more fixed-rate mortgages are reset at higher interest rates. The impact of higher debt servicing requirements are an important channel of monetary policy transmission.
Good on you MPC for sticking to your guns. over the last 18 months, you folks have been a good example of what the central banks ought to do. I’m encouraged to see the return of some normalcy in the financial world otherwise over the last 10 years the central banks had only propped up asset prices at the expense of savers
Don't forget among the comparable economies we were the first to stop QE - abruptly and for the right reasons. And since then we've been on a predictable path which is what our small economy needs otherwise, things would gyrate - our benchmark rates, our dollar, our current account, terms of trade, etc etc.
This is soft considering we import everything in this country. Even flowers and veges are imported in some months. The Reserve bank is not looking after the average kiwi here. They are just working for the rich and powerful. Average poor kiwis 70% do not have big mortgages and they do not care about OCR being high. They do care about price of things they need to survive everyday. So who's looking after the poor? Keeping OCR low means high price of everything else. So who wins? Rich and wealthy?
This is incorrect. By raising the OCR the RBNZ is increasing the value of the currency which lowers the price of imports. In effect your NZ dollar will go further. Poor people also have most of there money in bank accounts and not in real assets. Raising the OCR protects the savings of this group of people. A higher OCR is good for people who store there wealth in savings accounts at the bank.
At the end of the day. The big losers are those who have leveraged positions in the property market.
The key message is that consideration was given to a 75 basis point rise.
Unless something unexpected happens, that indicates that the next rise will also be at least 50 basis points. Given the 3 month delay between the next two OCR meetings (i.e. from November through to February) the chance of a 75 basis point rise in November has to now be a real possibility.
KeithW
Trouble is Keith monetary policy centralised like this is too much of a blunt instrument: they don't take time lag into account for starters ... every hike now simply deepens the recession which is already bedded in to take out the inflation 'we can control'. This policy is as disastrous as the monetary stimulunacy they conducted which largely caused the problem in the first place.
We have not got price stability out of central banking, we've got exaggerated boom and bust. We need to relook at the whole institution of central banking. The world does, urgently (Powell's over-reaction and the consequent currency chaos is destroying the developing world which risks the world entering further societal strife).
Perhaps viewing this as a long debt cycle as opposed to the shorter business cycle brings more context to what is happening.
If you look at this from a 75-100 year perspective, what is playing out helps make what appears irrational, far more rational.
(that is that the US is in self destruction mode and is in the process of protecting its global power status/reserve currency status - is likely to cause a lot of pain for many countries around the world in the years to come.....until someone can remove their power........in walks Putin with his plan to cause chaos.....we're a small boat on a big sea right now....and having a massive property bubble isn't a good place to be positioned when the storm arrives....at least we have a relatively low government debt/gdp ratio....it might be our only saviour).
No. That's all irrelevant flannel. This chaos has nothing to do with Putin. The housing crisis was solely down to the monetary stimulunacy of central banks, etc
Thankfully free markets are incredibly resilient, it takes a lot to destroy them. That's why it's taken just over 80 years since 1913 for central banking - which does not belong in free markets - to bring the financial system to the brink of collapse and that is why right now central banks have no policy options left: so taking the one to deepen a recession is recklessly stupid.
The result of bureaucrats making up the price of money on the hoof.
Sorry just had a laugh as you said my post was 'irrelevant flannel' then more or less repeated the exact point/s of my post! (by viewing it over the longer term).
And by the way, Putin can see the mess we've created and is exploiting the situation to try and cause maximum pain for the west....unless you can't connect the dots yet.
Big governments destroy freedoms and ultimately regulate markets to death. Fact. Our Western governments are way over classical liberal boundaries, we have a PM who just delivered a scathing speech against free speech and her wish to take that from us.
People like you, who've voted these woke fascists in - and Ardern showed in that anti-free speech 'moment' she is a true authoritarian fascist - and who foolishly trust that the 'state' - which is just self serving empire building individuals who work from anonymity like your own posts - has your best interests at heart, are the problem.
There's no way he could go higher as RBA went below expectations. And the rate rises should've been stopped: they never take account of time lag: a recession that fixes inflation is already in place, the central banks are now just ensuring the recession goes deeper than it has to.
So RB is really saying to retail banks that aren't doing any substantial increase yet
"Members noted the strong funding position of banks and that as a result, recent increases in wholesale interest rates have yet to be fully reflected in retail interest rates.'
get on with it retail banks or it's a 75 basis point increase on OCR in Feb! (Including deposit rates)
Lets see if the Fed follows its dot plot range 3.50 wont look so healthy then... I suspect the NZD will struggle even if the Fed goes 50 . My opinion 75 was the not only the logical option ,it was the only option , The Ozzies are dreamin and will be dragged into reality soon enough...
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