First impressions of the RBNZ’s February 2022 Monetary Policy Statement.
RBNZ Monetary Policy Statement, February 2022
- The Reserve Bank’s decision to increase the OCR by 25 basis points to 1% was as expected.
- However, the overall tone of the statement was notably more hawkish.
- The Committee noted that the decision between a 25bp and a 50bp increase was finely balanced.
- The RBNZ lifted its projected OCR track to a peak of around 3.4% in 2024, compared to a 2.6% peak in its November review.
- Furthermore, it announced a plan to reduce the size of its Government bond holdings over time through sales as well as maturities. This would presumably put some upward pressure on longer-term interest rates, adding to the overall tightening in financial condition.
- The RBNZ expects inflation to remain above the 1-3% target range through to early next year, and to linger in the upper half of the range in the following years.
Implications
The biggest surprise in today’s statement was the extent of the lift in the projected OCR track – higher even than our top-of-the-market forecast of 3%. The RBNZ’s activity and inflation forecasts are similar to ours in many respects, so the difference in view seems to lie in a judgement about what monetary policy settings will be needed to achieve those outcomes.
The RBNZ clearly faces a challenge in bringing inflation pressures under control. But as we noted in our latest Economic Overview, the housing market is already cooling in response to higher interest rates, and border restrictions and the spread of Omicron will weigh on the overall demand impulse over this year. As a result, we think the risks around our forecast of a 3% peak OCR are starting to look more two-sided.
For now, we continue to expect a series of 25bp hikes at upcoming policy reviews. However, given how much work the RBNZ believes it has ahead of it, the risk of a 50bp move at any given meeting remains live.
Full RBNZ statement
More tightening needed
The Monetary Policy Committee today increased the Official Cash Rate (OCR) to 1 percent. The Committee also agreed to commence the gradual reduction of the Reserve Bank’s bond holdings under the Large Scale Asset Purchase (LSAP) programme – through both bond maturities and managed sales.
The Committee agreed it remains appropriate to continue reducing monetary stimulus so as to maintain price stability and support maximum sustainable employment.
The level of global economic activity is generating rising inflation pressures, exacerbated by ongoing supply disruptions. The pace of global economic growth has slowed however, due to the general elevated uncertainty created by the persistent impacts of COVID-19, and clear signals that monetary conditions will tighten over the course of 2022.
In New Zealand, underlying economic strength remains in the economy, supported by aggregate household and business balance sheet strength, fiscal policy support, and continued strong export returns. However, some short-term economic disruption is expected given the current growing COVID-19 health challenge. The high vaccination rates across New Zealand will assist significantly to reduce this disruption.
Economic capacity pressures have continued to tighten. Employment is now above its maximum sustainable level, with a broad range of economic indicators highlighting that the New Zealand economy continues to perform above its current potential.
Headline CPI inflation is well above the Reserve Bank’s target range, but will return towards the 2 percent midpoint over coming years. The near-term rise in inflation is accentuated by higher oil prices, rising transport costs, and the impact of supply shortfalls. These immediate relative price movements risk generating more generalised price rises, especially given the current domestic capacity constraints.
The Committee agreed that further removal of monetary policy stimulus is expected over time given the medium-term outlook for growth and employment, and the upside risks to inflation.
