Reserve Bank of New Zealand Raise Rates Above Neutral Level Tightening “At Pace”

The Reserve Bank of New Zealand aggressive hiking cycle continues. It raised its Official Cash Rate by another 50 bps to 2.50%, as expected. The RBNZ is the first central bank in a developed money market to raise its cash rate above the neutral level. It also left the door open to another similar large increase at “at pace”. The bank projects the cash rate will double to 4.0% over the next year and remain there into 2024.


The Reserve Bank of New Zealand raised the cash rate to 2.5% from 2.0%.

New Zealand’s central bank delivered its fifth straight interest rate hike on Wednesday. The rises in the official cash rate which began last year were the first since 2014 when the OCR hit a post-GFC peak of 3.5 per cent.

Statement Highlights

“The committee agreed to maintain its approach of briskly lifting the official cash rate until it is confident that monetary conditions are sufficient to constrain inflation expectations and bring consumer price inflation to within the target range,” the RBNZ said in its statement.

“Members agreed that the increase in mortgage interest rates will assist to bring house prices more in line with sustainable levels,” the bank said.

“The committee also agreed that both high food and energy costs and rising mortgage interest rates will lead to more subdued household discretionary spending in coming quarters.”

Analyst Outlook:

Barclays economists interpreted the RBNZ’s statement as being less hawkish than previous meetings because it revealed concerns about a slowdown in growth in the medium term. New Zealand GDP surprisingly contracted by 0.2 per cent in the March quarter.

ANZ’s forecasts remain unchanged, projecting another half a percentage point increase in August, but then slowing to 25 basis point rises.

“Decisions are likely to get harder over the second half of the year as evidence mounts that tightening financial conditions are indeed dampening demand – and eventually inflation pressures – in the economy,” said Sharon Zollner, chief NZ economist at ANZ.

“The debate around ‘how much is too much’ will naturally get much louder. But that remains an issue for another day, with it remaining unclear whether inflation has even peaked, let alone how quickly it will come down.”

JPMorgan expects rates to rise by a quarter of a percentage point in August and is waiting for Monday’s inflation data before calibrating expectations beyond then.

RBNZ Statement

Release date 13 July 2022

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.

Source: RBNZ

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