After increasingg the Official Cash Rate (OCR) for the first time since May 2023, members of the Reserve Bank’s Monetary Policy Committee (MPC) say there’s uncertainty about where the neutral OCR currently sits.
On Wednesday, the Reserve Bank’s (RBNZ) six-member MPC reached a consensus to raise the Official Cash Rate (OCR) to 2.50% from 2.25%. When it came to its decision to hike, the RBNZ said although oil prices have fallen, the effects of the oil shock would linger for some time.
In its July Monetary Policy Review (MPR), external MPC member Prasanna Gai noted that “recent geoeconomic shocks may have increased New Zealand’s neutral interest rate by reducing global productive capacity and raising investment demand relative to available global savings”.
Asked about the neutral rate at a media conference, Governor Anna Breman said this rate was the policy rate that the RBNZ thinks is neither stimulative or restrictive for the economy or for inflation.
“Our assessment is that 2.25% was somewhat below neutral, so stimulative, so we are removing some of that stimulatory monetary policy and gradually moving towards neutral."
“There's always a bit of uncertainty exactly what the neutral rate is. We have an interval, it’s approximately 2.5% to 3.5%, the midpoint is around 3%, but what the Committee discussed at this meeting is that there is uncertainty around exactly where it is," Breman said.
Incoming data over the coming months will help inform the RBNZ of where they believe the neutral rate is, Breman said.
RBNZ chief economist and MPC member Paul Conway said with inflation and inflation expectations a bit higher at the moment; “the short-run neutral rate is probably a bit higher than that 2.5% to 3.5%, and that’s our long-run assumption for where neutral is once inflation pressures have worked their way through the system."
“There's a lot of uncertainty around estimates of neutral. We have many different ways of estimating it but the Committee … almost as important as those estimates, is sort of feeling our way and feeling how the economy responds to changes in interest rates to assess where we are relative to that idea of neutral.”
Future OCR hikes?
The MPR said: “With inflation still above target and economic activity expected to strengthen, some further reduction in monetary stimulus is likely to be required to return inflation to the 2% target midpoint."
“Future OCR decisions will depend on how incoming data, price-setting behaviour, and the strength of economic activity affect medium-term inflation pressures.”
Asked about the RBNZ’s upcoming September Monetary Policy Statement, and whether it would be a “live” decision, Breman said there was uncertainty about the timing of potential future rate hikes and that's always the case.
“Currently, we felt that we needed to stress that the uncertainty has increased, given that we're actually seeing inflation falling, and we're seeing growth recovering, and we have the potential now to see inflation falling and growth recovering at the same time.”
Breman said the RBNZ was not going to comment on any specific meetings.
“We still believe that it's likely we'll have to withdraw some more monetary stimulus, but the timing is highly uncertain,” she said.
Adding to this, Conway said: "Withdrawing monetary stimulus, I think are the key words there."
Unwinding LSAP holdings
The MPC has also approved a full divestment of what's left of the RBNZ's Covid-19 era Large Scale Asset Purchase (LSAP) holdings by June 2027.
The LSAP programme, or quantitative easing (QE), saw the RBNZ buy about $53 billion of Government and local government bonds from private investors to lower long-term interest rates and support borrowing during the pandemic.
A small residual position, mostly in Local Government Funding Agency (LGFA) securities, had been set to remain on the RBNZ’s balance sheet until 2037.
“This proposal involved bringing forward the final sale of $141 million of New Zealand Government Bonds from July 2027 to June 2027 and divesting the LGFA securities due to mature after June 2027, totalling $392 million, noting that LGFA provides a regular repurchase tender,” the RBNZ said.
Breman said the LGFA had conveyed to the RBNZ that they were comfortable with this decision.
Political responsibility?
Labour finance spokesperson Barbara Edmonds said Christopher Luxon and Nicola Willis were quick to take credit when mortgage rates came down, and needed to take responsibility "now they’re set to go back up".
"National promised to fix the cost of living, but two and a half years on, their record is higher costs and higher unemployment,” Edmonds said.
“National’s flawed plan was to let the Reserve Bank do the heavy lifting but this just shows they have no plan.”
Speaking to reporters after the OCR announcement, Finance Minister Nicola Willis said many banks had already anticipated there would be an increase in the OCR this year.
“That’s been reflected in the longer term rates that they have been setting. So in some senses this isn’t a surprise … Although I fully acknowledge that, of course, keeping interest rates as low as possible consistent with stable inflation is what we all want to see,” she said.
Willis acknowledged the Coalition Government was spending more but said it reflected the fact that it was taking in more revenue, had a larger population and more New Zealanders were receiving superannuation.
“We have growing demands on the public purse,” she said.
“I stand by my record and take responsibility for the fact that on our Government's watch, we've kept spending disciplined and under control, and we've ensured the Reserve Bank has a single price fighting mandate, and that stands us apart from the previous Government," she said, bringing up that inflation hit a peak of 7.3% in 2022 when Labour was in Government.
The next OCR Monetary Policy Statement will be on September 2. A review is also set for October 28, a week before the election.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.