Governor Adrian Orr announced that the official cash rate (OCR) has been lifted by the New Zealand government by 25 basis points to 1%. This is part of the easing of monetary policy stimulus measures undertaken during the pandemic and to help combat currently rising inflation, increasing housing costs, and tight labour market. Orr stated that boosting the OCR from its record lows set last year was to be expected considering the medium-term outlook for growth and employment.
It was also announced that the Reserve Bank of New Zealand (RBNZ) expects the OCR to keep rising through the year and grow past 3.25% by 2024. This is an upward review of its earlier estimate in November 2021 that the OCR would peak at 2.5 % by 2024. It was indicated that the OCR is expected to rise to about 2.5% by the end of this year.
There was some speculation in the financial markets that the RBNZ would hike the OCR by 50 basis points rather than 25, however, Orr contended that it was a finely balanced decision and that larger increases could not be ruled out in future. He said there was a need to observe the economy and market pricing to determine what effect would result in maintaining inflation.
Financial experts have termed the RBNZ’s decision as hawkish and aggressive. Head of research at BNZ, Stephen Toplis, said that the announcement suggested that the RBNZ was likely laying the groundwork for a half percentage point rise, possibly in May. ASB chief economist, Nick Tuffley, agrees and regards the move as a sign that the government is looking to lean much harder against inflation and is concerned about the risk of high inflation becoming embedded.
Businesses struggling due to supply chain challenges and the Omicron outbreak are however being warned of tough times ahead. Kiwibank’s Jarrod Kerr noted that while the OCR change was prudent, it was to be expected that consumer spending may fall and that business lending rates would rise. First time home buyers are also expected to take a hit as the OCR increase is being predicted to also impact mortgage rates negatively.
Orr also announced that the RBNZ was set to start selling its stockpile of government bonds amounting to some $55 billion. He said that the plan was to start reducing holdings by selling about $5 billion in bonds each year, as from July and through bond maturities. He added that the process would be carried out in collaboration with the Debt Management Office and was not expected to disrupt the secondary market. The government had been buying up bonds during the pandemic to help control interest rates and boost cash flow to the economy.
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