The Reserve Bank increased interest rates again

On 22 February, and in line with most economists’ expectations, the Reserve Bank increased the Official Cash Rate from 4.25 to 4.75% – the 10th consecutive increase since late 2021.

Why this decision?

The Monetary Policy Committee believes that it’s necessary, to get inflation back to where it needs to be in the medium term (from the current 7.2% to within the target range of 1 to 3%). Read on to learn more.

Signs of easing are not sufficient

Despite some signs of relief from price pressures, the RBNZ noted that core consumer price inflation is still too high, and employment levels are beyond their maximum sustainable rate. This means that more interest rate hikes are necessary to get the economy back on track.

Of course, all this is happening while parts of the country are still reeling from Cyclone Gabrielle and the January 2023 floodings. On this note, the RBNZ said it would take some time to understand the full economic impact, but they’re expecting some goods to experience price spikes in the coming weeks, and export revenues to take a hit.

A complicated environment

In their statement, the Reserve Bank noted that global economic activity remains subdued, which could have a dampening effect on global consumer pricing pressures. But while demand for goods and services in New Zealand remains strong, the RBNZ sees this as a double-edged sword, as labour shortages continue to constrain economic activity and contribute to heightened wage inflation.

By increasing interest rates, the Reserve Bank hopes to put a brake to the wage spiral and restore stability to the New Zealand’s economy. As some economists pointed out, the 50-point rise was expected, despite calls for the OCR to stay static following Cyclone Gabrielle and other weather events.

As ASB chief economist Nick Tuffley explained, “There was a case for doing so, but the impacts of weather disasters will only make the RBNZ’s job of curbing inflation more challenging. And the Government, banks and relief agencies will together be far more targeted (than the RBNZ) in getting needed support to those who need it.”

What does this mean for Kiwis?

It’s likely that mortgage rates will continue to move in the coming months. Some economists, like Westpac’s acting chief economist Michael Gordon, expect the OCR to peak at 5.25%, which may push fixed-term mortgage rates beyond 7%. Only time will tell.

Hopefully, higher interest rates will soon start having a restraining effect on demand, giving the Reserve Bank more peace of mind