RBNZ delivers fifth half-point hike, signals more to come

NEW ZEALAND’S central bank raised interest rates by half a percentage point for a fifth straight meeting and signalled more to come.

The Reserve Bank’s Monetary Policy Committee increased the Official Cash Rate (OCR) to 3.5 per cent from 3 per cent on Wednesday (Oct 5) in Wellington, as expected by most economists.

“The Committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and contribute to maximum sustainable employment,” the RBNZ said in a statement. “Core consumer price inflation is too high and labour resources are scarce.”

The central bank is undertaking its most aggressive tightening cycle since the OCR was introduced in 1999, seeking to rein in inflation that soared to a 32-year-high of 7.3 per cent in the second quarter. Its determination to keep lifting rates quickly contrasts with the Reserve Bank of Australia, which yesterday delivered a smaller-than-expected increase and said it wants to return inflation to target while also keeping the economy afloat.

“The key messages in the statement suggest the RBNZ is on track to deliver another 50 basis points in November and remains firm in its stance,” said Nick Tuffley, chief economist at ASB Bank in Auckland. “We continue to expect a 4.25 per cent peak in early 2023, with the risks clearly skewed up.”

The New Zealand dollar jumped more than half a US cent after the decision. It bought 57.85 cents at 2.26 pm in Wellington, up from 57.26 US cents beforehand.

Wednesday’s decision was an interim review rather than a quarterly Monetary Policy Statement, so the bank didn’t issue new forecasts and there is no press conference with governor Adrian Orr.

Upside risk

The RBNZ has been at the forefront of global rate hikes but the Federal Reserve has closed the gap with three 75-point moves, taking the benchmark federal funds rate target to 3-3.25 per cent. Those steps and projections of further tightening next year have boosted the greenback and weighed on other currencies including the New Zealand dollar.

“A lower New Zealand dollar, if sustained, poses further upside risk to inflation over the forecast horizon,” the RBNZ said today. Policymakers considered whether to increase the OCR by 75 basis points at this meeting before opting for 50, it said.

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The RBNZ didn’t make any reference to its most recent projections in August, which showed the benchmark rate rising to an average of 4.1 per cent early next year.

Some economists expect the OCR will need to keep rising in 2023, with those at ANZ Bank New Zealand predicting a peak of 4.75 per cent.

“New Zealand’s productive capacity is still being constrained by labour shortages and wage pressures are heightened,” the RBNZ said. “Overall, spending continues to outstrip the capacity to supply goods and services, with a range of indicators continuing to highlight broad-based pricing pressures.”

After raising the OCR by 3.25 percentage points in 12 months, the RBNZ must now balance the risk of fresh inflation pressure from the weaker kiwi dollar against the impact its hikes are already having on the housing market and economic growth.

The bank said today that the global tightening in monetary conditions also implies “a weaker growth outlook for New Zealand’s trading partners”. BLOOMBERG