Reserve Bank raises official cash rate by 0.25%, leaves forecast largely unchanged

Wednesday, 24 May 2023

Reserve Bank Governor Adrian Orr said it was first time the OCR decision had gone to a vote by the bank’s seven-person monetary policy committee.

The Reserve Bank has lifted the official cash rate by 0.25% to 5.5%, sticking to what most economists believed was its original plan before the Government’s higher-spending Budget last week.

Governor Adrian Orr said it expected inflation to continue to decline from its peak of 7.3% last year, but said “core inflation pressures” would remain until capacity constraints in the economy eased further.

He also noted the impact of strong migration, saying that while that would help ease labour shortages, its net impact on overall spending was “uncertain”.

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Orr said it was first time the OCR decision had gone to a vote by the bank’s seven-person monetary policy committee, which approved the 25bp raise by a majority of five to two, with two advising no increase. It has previously reached its decision by consensus.

Unusually, there had been no clear consensus among economists after the Budget on what the Reserve Bank would decide, with some economists still expecting a 25 basis point increase, some a 50bp increase, and some also advising there should be no increase at all.

The forecast for interest rates it released on Wednesday still showed the official cash rate peaking at its new level of 5.5%, but with a faster drop-off in the OCR in 2025.

It forecast the OCR would drop back to 3.3% at the end of its forecast period in June 2026.

It also predicted annual inflation would drop back to 4.9% by the end of the year and would fall back below the 3% upper limit of its target band in September next year, when it forecast inflation would drop to 2.7%.

Unlike the Treasury, the Reserve Bank still expects a technical recession this year, but only the very mildest of ones, with a 0.2% fall in GDP pencilled in for the three months to the end of June and a further 0.1% reduction in the follow quarter.

The bank’s monetary policy committee said it “discussed the impact of Budget 2023” and noted fiscal policy was projected to add to demand over the 2023-24 financial year, before dampening demand in subsequent years.

Overall, its commentary on the Budget appeared relaxed.

“Overall, fiscal policy will be contractionary on demand over the projection horizon,” it said.

Although future government spending was higher than the Reserve Bank had projected in February, much of the increase was due to the repair and rebuild of infrastructure following severe weather events, it said.

“Overall government spending growth has slowed from high levels as Covid support measures have been phased out. As a result, government spending will be less inflationary than in recent years,” it said.