The Reserve Bank has retained the official cash rate (OCR) at 0.25%, in keeping with the government’s stimulatory support for the economy. It has however also hinted at a possible one 25-basis-point rate increase as early as September of next year and a further 150-basis-point hike by 2024. This would bring the maximum cash rate to 1.75% and mean a transition from the current stimulatory approach that is supporting Covid recovery.
According to its May Monetary Policy Statement, the Reserve Bank confirmed that although economic growth had been slowed down over the summer, the economy was still recovering from the pandemic. Reserve Bank governor, Adrian Orr, said that the economy was doing better than in many other countries and that the economy had rebounded well to almost pre-Covid levels. He affirmed that positive projections suggested an increase in rates could be expected in 2022. Orr indicated that this would help normalise interest rates, marking a shift to more neutral ground.
He also said that the Reserve Bank was also looking to see a drop in unemployment from the current 4.7% to near 4% as stimulatory support continues. In the May Monetary Policy Statement, Orr added that export pricing was benefitting from a rise in global demand for New Zealand commodities. Costs were however rising as a result of high oil prices, disruption in the supply of global raw materials, and shipping complications. Orr however stated that the price pressures were likely a temporary effect and were expected to reduce as the year progresses.
The Reserve Bank further expects inflation to peak at about 2.6% this year and fall back below 2% in 2022. As inflation pressures are predicted to persist in the short term, the intention is to see stimulatory support continue over that period. The OCR is used by the Reserve Bank to help control inflation levels. When it is kept low, it encourages more borrowing, spending, and investment. When economic growth is spurred, it leads to a rise in inflation. Raising the OCR helps to keep the inflation rate in check.
It was further noted that despite stimulatory support, there was an uneven economic recovery being effected across sectors. Segments like housing construction were noted to be faring better than those reliant on international tourism. According to the report by the Reserve Bank, the economy was expected to have shrunk further due to the continued loss of international visitors during the first quarter of the year.