The Reserve Bank of New Zealand (RBNZ) today hiked the official cash rate (OCR) another 0.5% – the fifth consecutive double increase. This lifted the OCR to 3.5%, up from the record low 0.25% in August 2021. It also took the OCR to its highest level since April 2015.
In announcing its decision, the RBNZ noted that it gave serious consideration to an even larger hike, suggesting it remains hawkish:
The Committee discussed the pace and extent of monetary tightening required. Members agreed that the OCR needed to reach a level where the Committee could be confident it was sufficient to maintain expectations of low inflation in the longer term and bring consumer price inflation to within the target range.
The Committee considered whether to increase the OCR by 50 or 75 basis points at this meeting. Some members highlighted that a larger increase in the OCR now would reduce the likelihood of a higher peak in the OCR being required. Other members emphasised the degree of policy tightening delivered to date. Members also noted the lags in monetary policy transmission and a slow pass-through to retail interest rates. On balance, the Committee agreed that a 50 basis point increase was appropriate at this meeting.
The RBNZ raised concerns around wage growth and devaluation of the Kiwi dollar, which could lift inflation further:
The Committee agreed that the labour market remains very tight. Net migration remains negative and is yet to provide any sustained recovery in external labour supply. Members discussed the likelihood of further upside wage pressure given lags in the wage setting process…
Higher global interest rates and increased risk aversion in global markets have placed downward pressure on the New Zealand dollar…. A lower New Zealand dollar, if sustained, poses further upside risk to inflation over the forecast horizon…
It also noted that demand is running well ahead of productive capacity, which necessitates further monetary tightening:
New Zealand’s productive capacity is still being constrained by labour shortages and wage pressures are heightened. Overall, spending continues to outstrip the capacity to supply goods and services, with a range of indicators continuing to highlight broad-based 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.
So basically, the RBNZ is intent to follow the US Federal Reserve into recession.
