The Monetary Policy Committee of the Reserve Bank of New Zealand (RBNZ) today raised the official cash rate by 50 basis points to 2.0%, as expected. This is the fifth consecutive rate hike by the entity, whose rates are at their highest level since September 2016.
The Committee agreed that it remains appropriate to continue to tighten monetary conditions at the pace necessary to maintain price stability and support maximum sustainable employment. The Committee is determined to ensure that consumer price inflation is brought back within the target range of 1-3%.
In line with the economic outlook and risks ahead, monetary conditions need to act as a restraint on demand until a better match to New Zealand’s productive capacity occurs. A higher and earlier increase in the OCR reduces the risk of inflation becoming persistent, while providing more flexibility to monetary policy going forward.taking into account the great uncertainty of the global economic environment.
The level of global economic activity is generating growing inflationary pressures, exacerbated by ongoing supply disruptions driven by both the persistence of COVID-19 and the Russian invasion of Ukraine. The latter continues to cause very high prices for food and energy products.
The pace of global economic growth is slowing. Widespread tightening of global monetary and financial conditions is acting to dampen spending growth, accentuated by high food and energy costs. European geopolitical uncertainty is also weighing on business confidence and investment intentions around the world. Additionally, COVID-19 restrictions in major 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 labor market, strong household balance sheets, continued fiscal support, and strong terms of trade. The easing of COVID-19 health restrictions is also allowing an increase in economic activity, including hospitality and tourism.
However, the headwinds are strong. Increased global economic uncertainty and rising inflation are eroding global and domestic consumer confidence. Asset prices, particularly house prices, have also fallen, partly reflecting higher mortgage interest rates and increased housing supply.
Taken together, a wide range of indicators shows that productive capacity constraints and ongoing inflationary pressures continue to prevail. Employment remains above its maximum sustainable level, and labor shortage is now the main production constraint. The Reserve Bank’s measures of core inflation are above 3%.
The Committee agreed to continue raising the OCR at a rate that would safely bring consumer price inflation within the target range. The Committee considered that the expected path of the OCR is consistent with the achievement of its primary objectives of inflation and employment, without causing unnecessary instability in output, interest rates and the exchange rate. Once aggregate supply and demand are more balanced, the OCR will be able to return to a lower, neutral level.
Source: Fx Street