The Reserve Bank raised the Official Cash Rate by a record 75 basis points to 4.25% and signalled more to come, with its forecasts suggesting that a recession will be needed to rein in inflation.
RBNZ Monetary Policy Statement, November 2022
- The Reserve Bank has increased the Official Cash Rate by 75 basis points to 4.25%. The size of the move was generally expected by economists and financial markets.
- The big surprise was in the projected OCR track. The RBNZ expects the OCR will need to rise to a peak of 5.5% next year (compared to a 4.1% peak in its August forecasts).
- The RBNZ sees inflation as deeply embedded in the New Zealand economy. It now believes that a recession will be needed to bring inflation back within the 1-3% target range in the coming years.
- Even then, it has substantially upgraded its inflation forecasts compared to August, and is not expecting inflation to drop below 3% until the second half of 2024.
- The Monetary Policy Committee also discussed the possibility of a 100 basis point increase today, but settled on a 75 point increase, noting the lagged effects of past interest rate hikes.
- Our current forecast is for a 5% peak in the OCR by early next year. In our view this remains sufficient to bring inflation under control, with borrowers about to encounter substantially higher retail interest rates in the coming months.
- However, the risk is clearly for a higher peak in the near term, given the RBNZ’s inclinations.
RBNZ media release
Higher interest rates necessary
The Monetary Policy Committee today increased the Official Cash Rate (OCR) from 3.5 percent to 4.25 percent.
The Committee agreed that the OCR needs to reach a higher level, and sooner than previously indicated, to ensure inflation returns to within its target range over the medium-term. Core consumer price inflation is too high, employment is beyond its maximum sustainable level, and near-term inflation expectations have risen.
Global consumer price inflation is broad based and remains heightened. Food and energy prices, and persistent core inflation, have combined to create very high headline inflation in many countries. Central banks are tightening monetary conditions in an effort to slow spending and reduce inflation pressure. The ongoing slowdown in global growth will affect New Zealand through both financial and trade channels, and impact on people’s confidence due to uncertainty.
In New Zealand, household spending remains resilient, especially considering the rise in debt servicing costs, the fall in house prices, and low levels of consumer confidence. Employment levels are high, and income growth and household savings are supporting spending. The rebound in tourism is also supporting domestic demand.
The productive capacity of the economy is being constrained by broad-based labour shortages, and wage pressures are evident. Aggregate demand continues to outstrip New Zealand’s capacity to supply goods and services, with a range of indicators continuing to signify broad-based inflation pressure.
Committee members agreed that monetary conditions needed to continue to tighten further, so as to be confident there is sufficient restraint on spending to bring inflation back within its 1-3 percent per annum target range. The Committee remains resolute in achieving the Monetary Policy Remit.
