Reserve Bank's OCR move 'birdbrained' and spineless, says top economist

Wednesday, 24 November 2021

This was the Reserve Bank’s last scheduled review of interest rates until February 23.

A decision by the Reserve Bank to only raise the official cash rate by 25 basis points to 0.75 per cent on Wednesday has been labelled “birdbrained” and “spineless” by a top economist, who says the bank has missed a chance to head off rampant inflation.

ANZ and ASB raised their floating and flexible mortgage rates, despite the central bank electing only for a “cautious” 25bp rise in the OCR, rather than a larger 50bp hike.

Bank analysts and economists had been forecasting either a 25bp rise, or a ‘’double hike’’ of 50bp, as the Reserve Bank seeks to walk a line between keeping a lid on inflation while maintaining momentum in the economy.

Reserve Bank governor Adrian Orr said a 50bp rise was “amongst it” when the bank’s monetary policy committee met to consider where to set the OCR, acknowledging that it had acted “cautiously” by only electing for a 25bp rise.

But Orr said one of the reasons was that many mortgage holders were on short-term rates and that meant that the economy would be sensitive to the rise.

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What does the official cash rate mean?

Deputy governor Geoff Bascand said it expected about 70 per cent of mortgages to be repriced over the coming year.

The bank’s monetary policy committee said it discussed how fast interest rates needed to be increased, and explained there was “uncertainty about the resilience of consumer spending and business investment as the country adapts to living with the Covid virus in the community”.

Infometrics principal economist Brad Olsen said it had expected the Reserve Bank to only raise the OCR by 25bp, but he said that would “let inflation run rampant” and Infometrics felt a 50bp rise was called for.

The Reserve Bank is forecasting a 1.4 per cent dip in GDP in the year to March, as a result of Covid restrictions, but for inflation to peak at 5.7 per cent at the end of this year and early next year.

Olsen said restricting the OCR rise to 25bp was “birdbrained when all signs point towards the need to remove emergency monetary stimulus and dampen rampant demand”.

“If not now then when?” Infometrics chief economist Brad Olsen says the evidence the Reserve Bank needs to act strongly on inflation is already here.

In some of the most outspoken comments levelled at the Reserve Bank in recent times, Olsen said it had “doubled down on its spineless approach” by signalling “considered steps” in the OCR in future, when that approach risked letting inflation become more entrenched.

Orr said that, at the moment, the Reserve Bank saw “steady steps off 25 basis points … as the most balanced approach we can take”.

But Olsen questioned what it might take to persuade the Reserve Bank to take stronger action.

“The evidence is quite clear at the moment that we have the hottest inflationary environment in a decade. We've got the tightest labour market on record and substantially strong economic fundamentals.

“If not now, then when? Today was the time to be proactive and get out in front of it and the Reserve Bank now risks falling behind,” he said.

The Reserve Bank has frequently been wide of the market with its economic forecasts this year

June quarter-on-quarter GDP growth came in at 2.8 per cent, completely blowing away the bank’s forecast of 0.7 per cent growth, ahead of the Covid lockdowns from which businesses look set to soon largely escape.

Annual inflation in the September quarter was reported at 4.9 per cent, well above the bank’s 4.1 per cent August estimate, and unemployment also plummeted to 3.4 per cent in the quarter, far short of the track sketched by the bank.

But Orr said he was not concerned by the misses, which reflected the “very uncertain environment that all policymakers across almost any policy I can think of are confronting at this point”.

Orr said the bank was pleased it was managing to have markets in an orderly position “and to have inflation expectations well anchored over the period that matters for us”.

Despite the bank electing to only move the OCR by 25bp, there was a sting in the tail for borrowers, with it indicating it now saw the OCR rising to about 2.6 per cent by the end of 2023.

That updated its August forecast that only saw the OCR climbing to about 2.1 per cent by March the following year.

ANZ announced in the wake of the Reserve Bank statement that it was increasing the interest rates on its floating and flexible home loans by 20 basis points.

ASB also signalled an increase in its variable mortgage and “Orbit” revolving rates by 15bp to 4.6 per cent and 4.7 per cent respectively. ASB is raising the deposit rates on its Savings Plus and Headstart savings accounts by 25bp to 0.65 per cent.

The New Zealand dollar retreated 0.4 US cents to US69.1 cents within a few hours of the announcement, reflecting the bank’s decision not to raise by 50bp.

Kelvin Davidson, chief property economist at CoreLogic, said the Reserve Bank had chosen to take the more cautious path.

The Reserve Bank’s forecasts suggested the OCR would rise to about 2.5 per cent in late 2023, “but you’d have to think that this peak could be reached sooner or be higher, especially with today’s announcement from the Government that borders will reopen in the first half of 2022”, he said.

The implications for the residential property market were clear, Davidson said.

“There are further mortgage interest rate increases to come. With most shorter-term fixed rates now pushing up towards or above the 4 per cent mark, we’ve already seen them pretty much double from the previous lows, and figures of 5 per cent or more wouldn’t be a surprise over the next six to 12 months.”