Michael Gordon
Wellington, February 23, 2023
(RNZ Photo by Alexander Robertson)
The Reserve Bank of New Zealand (RBNZ) has raised the Official Cash Rate by 50 basis points (bp) to 4.75% and maintained its projection of a 5.5% peak in the coming months.
Surprisingly, there was almost no change to the projected OCR track compared to the November Policy Statement. The OCR is still expected to peak at 5.5% in the middle part of this year (albeit slightly later), and to fall only gradually from late next year.
We had expected a modest lowering of the OCR track, given that recent inflation outturns had not quite lived up to the very strong assumptions that the RBNZ had made.
The options that the Monetary Policy Committee considered this time was between a 50 bp and a 75 bp increase. The Committee went for the smaller move, noting that the upside risks to inflation had lessened since the November review.
There was no consideration of delaying interest rate hikes in response to Cyclone Gabrielle’s impact, noting that fiscal policy could address this more effectively.
Grappling with uncertainty
The Committee judged that the effects of the cyclone did not materially alter the outlook for monetary policy over the medium term. However, it is still early days in terms of assessing the scale of its impact, particularly in terms of the amount of rebuilding work it will generate.
The RBNZ is clearly grappling with an uncertain environment, even before the impact of Cyclone Gabrielle. It still sees upside risks to inflation in the near term. However, it also sees the risks being towards a shorter and sharper downturn in activity, and a more intense impact on household spending as homeowners roll on to higher mortgage rates.
Our current forecast is for the OCR to peak at 5.25%. In the coming months, we expect to see more evidence that higher interest rates are having a restraining effect on demand, which would give the RBNZ some comfort that it has done enough to put inflation on a path back towards the 1-3% target range.
The following is from RBNZ
The Committee agreed that the OCR still needs to increase, as indicated in the November Statement, to ensure inflation returns to within its target range over the medium term. While there are early signs of price pressure easing, core consumer price inflation remains too high, employment is still beyond its maximum sustainable level, and near-term inflation expectations remain elevated.
Cyclone Gabrielle and other recent severe weather events have had a devastating effect on the lives of many New Zealanders. It is too early to accurately assess the monetary policy implications of these weather events, given that the scale of destruction and economic disruption is only now becoming evident. The timing, size, and nature of funding the Government’s fiscal response are also yet to be determined.
The Committee’s current assessment is that over the coming weeks, prices for some goods are likely to spike and activity will be weaker than previously expected. Export revenues will be negatively impacted. Monetary policy is set with a medium-term focus, and the Committee will look through these short-term output variations and direct price effects. In time, the infrastructure and community rebuild will add to activity and inflationary pressures, especially given existing capacity constraints in the economy.
The global scene
Internationally, core inflation remains high and inflationary pressures remain broad-based. However, the outlook for global economic activity in 2023 remains subdued, which is acting to lower global consumer pricing pressures, as well as demand for New Zealand’s key commodity exports. Continued growth in services exports will provide some export revenue offset.
Domestically, demand remained robust through 2022 underpinned by resilient household spending, construction activity, government spending, and a swift recovery in international tourism as the border reopened. Labour shortages remain a significant constraint on economic activity, contributing to heightened wage inflation. People are moving jobs at an elevated pace, consistent with labour shortages and strong demand.
While there are early signs of demand easing it continues to outpace supply, as reflected in strong domestic inflation. The Committee agreed that monetary conditions need to tighten further, as indicated in the November Statement, so as to be confident there is sufficient restraint on spending to bring inflation back within its 1 to 3% per annum target range. The Committee remains determined to achieve its Monetary Policy Remit.
