The Reserve Bank (RBNZ) has raised the Official Cash Rate (OCR) by 50 basis points despite the recent floods and cyclone, saying it needs to press on with getting inflation under control – with further rate rises in the pipeline.
The OCR rose to 4.75 percent, the highest it has been since December 2008, the 10th consecutive rise since the tightening phase began in October 2021.
The rise was expected as the central bank grapples with inflation, which has settled at a 32-year high of 7.2 percent and shown few signs of falling.
Some economists had suggested the RBNZ should not raise the OCR at all, or at least trim it back 25 basis points because of the economic impact of the upper North Island floods and Cyclone Gabrielle and because there were signs of easing in prices and the tight employment market.
The monetary policy committee said in a statement it had taken the weather events into account as well as the broader economic outlook at home and abroad.
“It is too early to accurately assess the monetary policy implications of these weather events, given that the scale of destruction and economic disruption are only now becoming evident.
“The committee’s current assessment is that over coming weeks, prices for some goods are likely to spike and activity will be weaker than previously expected. Export revenues will be negatively impacted.
“Monetary policy is set with a medium-term focus, and the committee will look through these short-term output variations and direct price effects.”
National Party leader Christopher Luxon said the OCR hike would be painful for many households, but the hike was necessary because the government had mismanaged its finances, he said.
“It’s incredibly worrying if you’re a mortgage holder in New Zealand,” Luxon said.
Minister of Finance Grant Robertson said the central bank was doing its job.
“They have a mandate to bring inflation down to between 1 and 3 percent,” Robertson said.
“Inflation is well above that at this time – inflation is a scourge particularly for low and middle income earners, and so that is their job to do that.”
The Monetary Policy Committee said there were some signs that inflation and domestic activity were slowing, but overall activity had remained resilient.
“The committee agreed that monetary conditions need to tighten further… to bring inflation back within its 1 to 3 percent per annum target range. The committee remains determined to achieve its Monetary Policy Remit.”
It said it had debated whether to raise the OCR by 75 basis points, as it did in November, but decided the smaller rise was appropriate given early signs of a slowing economy.
Projections accompanying the statement had the OCR rising to 5.5 percent towards the end of the year, and no hint of a cut before late 2024.
Among economic forecasts were three quarters of economic contraction starting in the middle of next year, but a shorter recession than forecast last November.