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HomeCentral BanksReserve Bank of New Zealand(RBNZ) Monetary tightening continues

(RBNZ) Monetary tightening continues

The Monetary Policy Committee today increased the Official Cash Rate (OCR) to 2.50 percent.

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.

Summary Record of Meeting – July 2022

The Monetary Policy Committee discussed developments affecting the outlook for inflation and employment in New Zealand. Members agreed that developments were broadly in line with their assessment at the May Monetary Policy Statement. 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 judged that the global economic outlook has continued to weaken, broadly as anticipated. The weaker outlook reflects a tightening of financial conditions, ongoing global supply disruptions, and rising geopolitical tensions. The Russian invasion of Ukraine continues to cause disruption to the supply of oil, gas and food commodities, resulting in continued high prices for food and energy. Ongoing health restrictions are exacerbating supply disruptions, as currently most notable in China.

Globally, many central banks have increased policy rates in response to rising inflationary pressures, to realign economic demand with supply. Members agreed that global inflationary pressures will likely persist in the near-term, as reflected in ongoing high domestic import prices and elevated shipping costs.

Members noted that the New Zealand dollar exchange rate has depreciated since the May Monetary Policy Statement. A moderation in global commodity prices, amid a continued decline in investor risk appetite, and rising central bank policy rates globally have contributed to this depreciation. The Committee noted that the weaker New Zealand dollar is continuing to have an impact on New Zealand dollar import prices.

In New Zealand, GDP contracted modestly in the March 2022 quarter. However, these data remain volatile, with a catch-up in government spending and exports expected. Increased visitors to New Zealand are also supporting hospitality and tourism. Meanwhile, household spending has remained resilient despite a decline in consumer confidence.

Financial conditions have continued to tighten with mortgage rates rising in response to, and in anticipation of, increases to the Official Cash Rate (OCR). Asset prices, including house prices, continue to decline. Members agreed that the increase in mortgage interest rates will assist to bring house prices more in line with sustainable levels. 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.

Members noted that while there are near-term upside risks to consumer price inflation, there are also medium-term downside risks to economic activity. Despite these risks, members agreed that capacity pressures remain pervasive. Labour shortages continue to be a major constraint for business activity, as are the ongoing impacts of global supply chain disruptions. A resurgence in COVID-19 cases and a rise in other seasonal illnesses continues to constrain productive capacity in New Zealand. The recent removal of travel restrictions have also enabled a net outflow of labour in the near-term. Members agreed that employment is above its maximum sustainable level, and that rising wage pressure remains an expected outcome. Meanwhile, core inflation measures are around 4 percent.

The Committee discussed the unique shocks the economy is currently facing relative to historical experience. These developments increase the uncertainty about how households and firms will respond to a tightening of monetary policy. The Committee agreed that observing how households and firms are responding to these economic challenges will be important to understanding when monetary policy settings will be sufficient to achieve its remit objectives.

The Committee agreed to maintain its approach of briskly lifting the OCR until it is confident that monetary conditions are sufficient to constrain inflation expectations and bring consumer price inflation to within the target range. The Committee remains broadly comfortable with the projected path of the OCR outlined in the recent May Monetary Policy Statement. Once aggregate supply and demand are more in balance, the OCR can then return to a lower, more neutral, level. The Committee viewed this strategy as consistent with achieving their primary inflation and employment objectives without causing unnecessary instability in output, interest rates and the exchange rate.

On Wednesday 13 July, the Committee reached a consensus to increase the OCR to 2.50 percent.

Attendees:

Reserve Bank staff: Adrian Orr, Karen Silk, Christian Hawkesby, Adam Richardson,
External: Bob Buckle, Peter Harris, Caroline Saunders
Treasury Observer: Tim Ng
Reserve Bank observer: Paul Conway
Secretary: Sandeep Parekh

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