Another 50 basis point hike in the OCR to 3%, with the Reserve Bank firmly focused on inflation developments.
RBNZ Monetary Policy Statement, August 2022
• The Reserve Bank has increased the Official Cash Rate by another 50 basis points to 3%. The size of the move was universally expected by economists and financial markets.
• The RBNZ now projects the OCR to reach a peak of 4.1% by the middle of next year, up from a peak of 3.95% in its May forecasts.
• The short media release accompanying the statement focused largely on the extent of inflationary forces in the economy.
• The RBNZ believes that annual inflation peaked at 7.3% in the June quarter, but does not expect it to return within the 1-3% target range until the middle of 2024.
• The RBNZ does not seem to buy into any signs of softening in the local economy, instead highlighting capacity constraints as the biggest restraint on growth.
• The RBNZ repeated its comments that “it remains appropriate to continue to tighten monetary conditions at pace”. This leaves the door open for further 50 basis point hikes at the October and November reviews, in line with our forecast.
• We recently upgraded our OCR forecast to a peak of 4% by the end of this year. Today’s statement is consistent with our forecast.
• However, we remain of the view that tightening is unlikely to continue into next year. We differ from the RBNZ in that we see early signs that higher interest rates hare having the desired impact in terms of cooling domestic demand. We expect that that will become more evident to the RBNZ by the November review.
RBNZ media release
Ongoing monetary tightening
The Monetary Policy Committee today increased the Official Cash Rate (OCR) to 3 percent from 2.5 percent. The Committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and contribute to maximum sustainable employment. Core consumer price inflation remains too high and labour resources remain scarce.
Global consumer price inflation has continued to rise, albeit with some recent reprieve from lower global oil prices. The war in Ukraine continues to underpin high commodity prices, with global production costs and constraints further exacerbated by supply-chain bottlenecks due to the ongoing COVID-19 health challenge. The outlook for global growth continues to weaken, reflecting the ongoing tightening in global monetary conditions.
In New Zealand, domestic spending has remained resilient to global and local headwinds to date. Spending levels are supported by a robust employment level, continued fiscal support, an elevated terms of trade, and sound household balance sheets in aggregate.
However, production is being constrained by acute labour shortages, heightened by seasonal and COVID-19 related illnesses. In these circumstances, spending and investment continues to outstrip supply capacity, and wage pressures are heightened. A range of indicators highlight broad-based domestic pricing pressures.
Committee members agreed that monetary conditions needed to continue to tighten until they are confident there is sufficient restraint on spending to bring inflation back within its 1-3 percent per annum target range. The Committee remains resolute in achieving the Monetary Policy Remit.
