The Reserve Bank lifted the OCR by 50 basis points as widely expected, and signalled further large moves to come. While it’s a more assertive profile than we expected from the RBNZ today, it’s in line with our forecast of how 2022 will ultimately play out.
RBNZ Monetary Policy Statement, May 2022
- The Reserve Bank increased the OCR by 50 basis points to 2%. This was widely expected by forecasters and was fully priced by financial markets.
- The real interest was always going to be in the RBNZ’s projections for future OCR moves, and this proved to be more aggressive than we expected from them at this point.
- The RBNZ projects the OCR to reach a peak of close to 4% by the second half of next year, with most of those increases being front-loaded. That includes an implied OCR of 3.5% by the end of this year.
- This is a substantial upgrade to the OCR track compared to the 3.4% peak in the February MPS (and which was broadly endorsed in the April policy review).
- The RBNZ emphasised that this would be a temporary peak in the OCR, rather than a permanently higher level.
- The intention is to keep monetary policy ‘tight’ for long enough to bring demand and supply into better alignment, before returning interest rates to more sustainable long-term levels.
- The RBNZ expects inflation to remain elevated for a while, not returning to within the 1-3% target range until the end of 2023.
- Concern about inflation expectations, and the perceived need to reassert the 2% midpoint of the inflation target, have been an ongoing and escalating theme of recent RBNZ statements.
- We recently revised our OCR forecasts to include four consecutive 50bp rate hikes between April and August, on the way to a peak of 3.5% by the end of this year. The RBNZ’s projections effectively endorse this profile.
- Where we differ from the RBNZ’s view is in the need for the OCR to keep rising into 2023, by which time the main drivers behind inflation are likely to be looking much less ominous.
Full RBNZ statement
Monetary conditions tighten by more and sooner
The Monetary Policy Committee today increased the Official Cash Rate (OCR) to 2.0 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.
Consistent with the economic outlook and risks ahead, monetary conditions need to act as a constraint on demand until there is a better match with New Zealand’s productive capacity. A larger and earlier increase in the OCR reduces the risk of inflation becoming persistent, while also providing more policy flexibility ahead in light of the highly uncertain global economic environment.
The level of global economic activity is generating rising inflation pressures, exacerbated by ongoing supply disruptions driven by both COVID-19 persistence and the Russian invasion of Ukraine. The latter continues to cause very high prices for food and energy commodities.
The pace of global economic growth is slowing. The broad-based tightening in global monetary and financial conditions is acting to slow spending growth, accentuated by the high costs of basic food and energy staples. European geopolitical uncertainty is also weighing heavily on business confidence and investment intentions worldwide. Likewise, COVID-19 restrictions in significant regions of China are exacerbating supply chain disruptions and adding cost and complexity to trade.
In New Zealand, underlying strength remains in the economy, supported by a strong labour market, sound household balance sheets, continued fiscal support, and a strong terms of trade. The reduction in COVID-19 health-related restrictions is also enabling increased economic activity, including hospitality and tourism.
However, headwinds are strong. Heightened global economic uncertainty and higher inflation are dampening global and domestic consumer confidence. Asset prices, in particular house prices, have also declined, reflecting in part higher mortgage interest rates and increased supply of housing.
On balance, a broad range of indicators highlight that productive capacity constraints and ongoing inflation pressures remain prevalent. Employment remains above its maximum sustainable level, with labour shortages now the major constraint on production. The Reserve Bank’s core inflation measures are above 3 percent.
The Committee agreed to continue to lift the OCR at pace to a level that will confidently bring consumer price inflation to within the target range. The Committee viewed the projected path of the OCR as 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.