In a further attempt to keep inflation down, the Reserve Bank of New Zealand (RBNZ) has announced a new hike to the Official Cash Rate (OCR) by 50 basis points. This brings the OCR to 4.75%, with some economists predicting that it will peak at 5%. This is the highest OCR rate achieved since December 2008. Inflation currently stands at 7%, which is lower than earlier central bank predictions for early 2023 of 7.2%.
The bank has acknowledged that it is too early to correctly assess the monetary policy implications at a time when there have been widespread devastations and economic disruption resulting from recent storms that hit the northern and eastern parts of the country. The RBNZ is also expecting the storms to add an estimated 0.3 percentage points to inflation in the March and June quarters of 2023.
Despite calls from some experts to pause further hikes in the wake of the most recent storm, Cyclone Gabrielle, the RBNZ indicated that even with resulting stress on affected communities, inflationary pressure would still be sustained and that it needed to press on with getting inflation under control. Further hikes have been confirmed to be in the pipeline.
Increasing the OCR is done to help push for higher interest rates on borrowing. When people are forced to pay more on their borrowings, including mortgages and credit cards, they tend to spend less. With less spending comes less demand, pushing businesses to become more competitive by lowering prices which should encourage inflation to fall.
The Monetary Policy Committee has estimated that in the coming weeks, activity can be expected to become weaker, with the prices of some commodities likely to rise sharply. They also expect export revenues to fall. The committee will continue to monitor these short-term output variations and price fluctuations while keeping a medium-term focus on monetary policy. In deciding to hike the OCR, the committee has affirmed that it took into consideration the adverse weather events as well the broader economic outlook locally and globally.
National Party leader, Christopher Luxon, has agreed with the need to raise the OCR, however stating that it was a result of the government having mismanaged finances. He expressed particular concern for the country’s mortgage holders. Grant Robertson, the Minister for Finance, has however said that the central bank was simply doing its job in bringing down inflation to between 1% to 3% at a time it has skyrocketed. He said that the committee was committed to achieving its Monetary Policy Remit.
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