The The Monetary Policy Committee has today increased the official interest rate on cash (OCR) from 2.5% to 3%, meeting expectations of a 50 basis point rise. This is the seventh consecutive increase in rates, reaching their highest level since 2015.
Reserve Bank of New Zealand statement
Demand from the New Zealand economy has been resilient
Demand in the New Zealand economy remained resilient to global and domestic headwinds through the first half of 2022.
Household spending is holding up, despite low consumer confidence and high inflation. In general, household budgets have been bolstered by high levels of employment, savings accumulated during the COVID-19 lockdowns, and government support payments.
A significant increase in international visitor arrivals following the reopening of borders has likely boosted demand in the tourism and hospitality sectors.
Shortages of labor and materials slow down the economy and increase inflation
The unemployment rate remains very low, at 3.3%. The New Zealand economy is constrained by a severe labor shortage. A wide range of indicators continues to point to employment above its maximum sustainable level.
Higher-than-usual levels of illness from COVID-19 and other illnesses, as well as the outflow of New Zealanders abroad following the reopening of our border, have exacerbated labor shortages.
A very tight job market is coupled with high consumer price index (CPI) inflation, and wage growth continues to rise as companies compete to attract or retain staff.
However, this wage growth continues to be outpaced by rising costs of living for many New Zealanders.
Bottlenecks in the global and local supply chain are limiting and slowing production, making products more expensive and further restricting output. The war in Ukraine and the COVID-19-related closures in China add pressure to these bottlenecks.
House prices have continued to fall towards more sustainable levels, and the outlook for residential construction has weakened
House prices have continued to fall towards more sustainable levels.
We expect house prices to continue to decline in the coming months.
Construction sector activity has remained at a high level, but the outlook for residential construction has weakened.
The combination of acute labor and material shortages in the construction sector has limited activity and contributed significantly to domestic inflationary pressure. Future works orders have begun to drain beyond the labor reserves of construction companies. Rising interest rates, tightening loan conditions and rising costs are weighing on demand.
Higher interest rates are needed to meet our inflation and employment targets
Annual CPI inflation has continued to rise, reaching 7.3% in the April-June 2022 quarter, due to a mix of domestic and international factors.
Measures of persistent or “core” inflation have also risen. Inflation expectations have recently decreased but remain elevated relative to history.
The Monetary Policy Committee anticipates that it will need to raise the OCR more than forecast in May for inflation to return to the midpoint of the Monetary Policy Committee’s target and employment to reach its maximum sustainable level.
The Committee agreed that it remains appropriate to continue to tighten monetary conditions at the pace necessary to maintain price stability and contribute to the highest level of sustainable employment. Underlying consumer price inflation remains too high and labor resources remain tight.
Source: Fx Street
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