The Reserve Bank lifted the OCR another 50 basis points to 2.50% as expected, and it remains focused on the risks of persistent inflation in a capacity-constrained economy.
RBNZ Monetary Policy Review, July 2022
- The Reserve Bank raised the OCR by 50 basis points to 2.50%, as widely expected.
- The key language in the statement was largely identical to the May review.
- The RBNZ still intends to raise interest rates “at pace”, and remains “resolute” in its commitment to bring inflation back within target.
- The RBNZ indicated that the OCR path projected in the May Monetary Policy Statement was still appropriate.
- The RBNZ noted upside risks to inflation and downside risks to activity in the near term.
- However, its concern remains with the risk of persistent inflation over the medium term, reflecting the pervasive capacity pressures in the economy.
Implications
The main signal to take from today’s statement was the lack of a signal – there is no change in the RBNZ’s plans to get on top of inflation through assertive action. As such, there is no reason to change our view of a further 50 basis point hike at the August Monetary Policy Statement. That would be entirely in line with the RBNZ’s May projections.
The August review itself may be an opportunity to review the situation. For one, the OCR will have reached 3% by that point, much closer to the endpoint that the RBNZ envisages. Secondly, it will have the benefit of a full set of economic forecasts, along with additional time to consider the weakening global backdrop. We still expect further, though more modest, rate hikes beyond that, reaching a peak of 3.50%.
More detail in our bulletin later today.
RBNZ media release
Monetary Tightening Continues
The Monetary Policy Committee today increased the Official Cash Rate (OCR) to 2.50 percent. The Committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and support maximum sustainable employment. The Committee is resolute in its commitment to ensure consumer price inflation returns to within the 1 to 3 percent target range.
The level of global economic activity, combined with the ongoing supply disruptions largely driven by both COVID-19 persistence and the Russian invasion of Ukraine, continue to generate global inflation pressures. Food and energy prices are especially affected by geopolitical tension. However, the pace of global economic growth is slowing. The broad-based tightening in global monetary and financial conditions is acting to reduce spending growth. Asset prices have also declined due to higher interest rates and a weaker earnings outlook.
In New Zealand, domestic spending remains supported by high employment levels, resilient household balance sheets in aggregate, continued fiscal support, and a strong terms of trade. The reduction in COVID-19 health-related restrictions is also enabling increased demand. Labour and resource scarcity are also contributing to upward price pressures which are currently exacerbated by seasonal illness, a resurgence in COVID-19 cases, and a net outflow of labour abroad.
In these circumstances, spending and investment demand continues to outstrip supply capacity, with a broad range of indicators highlighting pervasive inflation pressures. Employment remains above its maximum sustainable level and the Reserve Bank’s core inflation measures are around 4 percent. The Committee acknowledged there is a near-term upside risk to consumer price inflation and emerging medium-term downside risks to economic activity.
The Committee agreed to continue to lift the OCR to a level where it is confident consumer price inflation will settle within the target range. The Committee is comfortable that the projected path of the OCR outlined in the recent May Monetary Policy Statement remains broadly consistent with achieving its primary inflation and employment objectives – without causing unnecessary instability in output, interest rates and the exchange rate. Once aggregate supply and demand are more in balance, the OCR can then return to a lower, more neutral, level.
