Reserve Bank front loads interest rate rises with 0.5% official cash rate hike

Wednesday, 13 April 2022

What does the official cash rate mean?

The Reserve Bank has responded to rising inflation by hiking the official cash rate by half a percentage point to 1.5 per cent but signalled its overall view of where interest rates are heading has not changed.

Economists had been divided before the announcement on whether a 25 basis point rise to 1.25 per cent or a 50bp hike was in the wings.

The bank appeared to slightly soften its move by saying it remained comfortable with the outlook for interest rates that it last published in February and that “a larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic environment”.

Moving the OCR to “a more neutral stance sooner” would reduce the risks of rising inflation expectations, it said.

* US inflation hits 8.5% ahead of NZ interest rate decision

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Westpac economist Michael Gordon said the decision amounted to one of “earlier, rather than more” monetary tightening.

ASB and BNZ had suggested the decision from the Reserve Bank would amount to “a coin toss”.

But ANZ chief economist Sharon Zollner said it was sticking with its forecast of another 50 basis point rise in the OCR to 2 per cent when interest rates are next reviewed on May 24.

The Reserve Bank forecast inflation would peak at about 7 per cent in the next few months but said the risk of more persistent high inflation expectations had increased.

Capital Economics economist Ben Udy described the central bank’s move as “hawkish” and said it showed it was willing to move decisively to get a hand on surging inflation.

“We expect it to hike the OCR to 3 per cent by the end of this year,” he said.

CoreLogic chief property economist Kelvin Davidson said the bank had gone for the “shock factor” by raising the OCR 50 basis points.

“For the housing market, the implications are clear,” he said. “Even though mortgage rates have already been rising again in recent weeks, this process isn’t over yet.

“Many ‘special’ fixed-rate mortgages in the popular one to two-year terms are currently in the range of 4 to 5 per cent, and it seems fair to suggest that this could end up in the range of 5 to 6 per cent over the coming months, perhaps a bit above,” he said.

The house price drop is a sign house prices are moving towards “a more sustainable level”, Reserve Bank says.

The Reserve Bank said Russia’s invasion of Ukraine had added to ongoing supply disruptions that were in large part driven by Covid, causing prices for internationally-traded commodities and energy to spike.

But it also noted the pace of global economic activity continued to slow with heightened global economic uncertainty and inflation dampening consumer confidence.

“In New Zealand, underlying strength remains in the economy, supported by sound balance sheets, continued fiscal support, and strong export earnings,” it said.

“There has been some economic disruption due to the outbreak of Omicron. However, the high vaccination rates across New Zealand are assisting to reduce this disruption.”

National Party finance spokeswoman Nicola Willis accused the Government of overheating the economy.

Employment was above its maximum sustainable level and labour shortages were impacting many businesses, it said.

“The rise in mortgage interest rates – amongst other factors – has acted to reduce mortgage demand and house prices.

“However, economic capacity pressures remain, with a broad range of indicators highlighting domestic capacity constraints and ongoing inflation pressures.”

The bank said it would “remain focused” on ensuring current high consumer price inflation did not become embedded into longer-term inflation expectations.

The Reserve Bank expected a return to net immigration in the medium term but said that would take some time to rebuild.

“Near-term indicators highlight that New Zealanders are currently leaving in larger numbers than visitors are arriving, as the border is opened in stages,” it said.

Kiwibank has forecast that there could be a net exodus of 20,000 people from New Zealand this year.

The Reserve Bank said falling house prices were a sign house prices were moving towards “a more sustainable level”.

“Home building intentions remain at record levels, which will assist this adjustment.

“However, construction activity faces challenges, including access to land, rising building costs, ongoing supply chain bottlenecks, and limited access to labour,” it said.

National Party finance spokeswoman Nicola Willis said the “biggest official cash rate hike in 22 years” meant more pain for households struggling with the cost of living and accused Finance Minister Grant Robertson of “overheating” the economy.

With inflation at its highest level in three decades, the Reserve Bank had no choice but to raise interest rates, she said.

The New Zealand dollar initially jumped about 0.3 US cents but then quickly shed all of that gain and was trading marginally lower shortly after 3pm, after traders digested the bank’s statements.