- The Reserve Bank of New Zealand announced its official cash rates today (5 October 2022).
- As was widely expected by the bank’s economists, the raise is of 50 bps again.
- This brings the total OCR to 3.5%.
After Reserve Bank of Australia delivered a 25-bps rate hike on Tuesday (October 4), the Reserve Bank of New Zealand (RBNZ) in its monetary policy decision announced today (5 October 2022) raised the official cash ratio (OCR) by 50 bps. This is expected to cool off inflation and is in accordance with the widely held expectation.
The increase in the OCR is the fifth consecutive 50-bps hike and has taken the OCR from 3% to 3.5%.
With the recession looming large, the central bank has to strike a balance between inflation and recession, and the bank’s economists now say that the rate hikes would peak at between 4.25% and 4.75%.
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According to the RBNZ statement today, it was appropriate to continue to tighten the monetary policy to maintain price stability and contribute to maximum sustainable employment. According to the bank, core consumer price inflation was too high.
The RBNZ further said that global consumer price pressure was high as the demand for food and services exceeded the supply capacity. This puts upward pressure on prices. Further, the war in Ukraine was adding to the pressure on food and energy.
Even then in New Zealand, the level of domestic spending has been resilient, employment rates are high, and household balance sheets remain sound. But the demand outstrips the supply in NZ, with other indicators pointing towards pressure on prices, the RBNZ release said.
As per the statement, the committee members agreed that monetary conditions needed to continue to tighten until they were confident that there was sufficient restraint on spending to bring inflation back within its 1%-3% per annum target range.
Accordingly, bank economists now forecast the OCR to peak next year at a rate between 4.25% and 4.75%.
New Zealand economists had expected the RBNZ to raise the OCR by 50 bps to 3.5%. This is despite a comment by RBNZ governor Adrian Orr, who said that the bank’s cycle of monetary policy tightening was “well advanced” and “very mature”.
New Zealand’s major banks went a step further by forecasting a similar rate hike in November in their last monetary policy statement of the year 2022.
The economists also said that the interest rate hike by the US Federal Reserve last week also put pressure on the Kiwi dollar and other currencies, which could force inflation to rise further.
With the New Zealand dollar lower against the US dollar, inflation is likely to rise due to increased costs of imports.
The OCR was introduced in 1999. It was at its highest level, 8.25%, from July 2007 to July 2008. At that time, oil prices were soaring, and the global financial crisis was underway.