Reserve Bank hikes official cash rate to 4.75%

Wednesday, 22 February 2023

Reserve Bank governor Adrian Orr released the bank’s first monetary policy statement of the year against a backdrop of fresh economic uncertainty caused by Cyclone Gabrielle.

The Reserve Bank has raised the official cash rate by 50 basis points to 4.75%, saying it is too early to assess the monetary-policy implications of Cyclone Gabrielle.

Financial markets and most analysts had assumed ahead of the announcement that a 50 basis point rate rise was most likely, with many warning that the damage caused by the cyclone would give fresh legs to inflation while also increasing the risk of a recession.

The Reserve Bank’s monetary policy committee said it was too early to accurately assess the monetary policy implications of Cyclone Gabrielle “given that the scale of destruction and economic disruption are only now becoming evident”.

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Greg Smith from Devon Funds was one of many who correctly tipped the 50bp rate rise.

“The timing, size, and the nature of funding the Government’s fiscal response are also yet to be determined,” it noted.

It said its current assessment was that over coming weeks, prices for some goods were likely to spike and economic activity would be weaker than previously expected.

Export revenues would also be negatively impacted by the storms, it said.

But it said monetary policy was set with “a medium-term focus” and it would “look through these short-term output variations and direct price effects”.

The bank justified its rate rise by saying that while there were early signs of price pressures easing, core consumer price inflation remained too high, employment was still beyond its maximum sustainable level, and near-term inflation expectations remained elevated.

The Reserve Bank slightly adjusted its forecast of where future interest rates were heading.

It is still forecasting the OCR will peak at 5.5% later this year, but it does not now expect that peak to be reached until towards the end of the year.

The Reserve Bank said it was too early to assess the monetary policy implications of Cyclone Gabrielle.

It is now forecasting annual inflation will peak for the year at 7.3% in the March quarter, after its November prediction that inflation would rise to 7.5% in the December quarter proved incorrect.

But it is predicting inflation will be a bit more sticky and will only fall to 4.2% by the March 2024 quarter, rather than to 3.8%.

Reserve Bank governor Adrian Orr opened a media conference on its decision saying the bank’s thoughts were with the thousands of people who had been seriously affected and were suffering as a result of the floods.

Asked whether the economy still needed a bank-engineered recession, Orr said the bank’s view was that demand had to slow considerably to meet supply and remove inflationary pressures.

It was still projecting the economy to contract by around 1%, he said.

Orr said the monetary policy committee did discuss raising the OCR by 75bp to 5%, but assistant governor Karen Silk said its deliberations were “very heavily weighted” towards the 50bp rise that it agreed.

Kiwibank chief economist Jarrod Kerr had called for the central bank to “pause” rate hikes and leave the OCR unchanged at 4.25% in the light of the economic shock expected from the cyclone.

ASB chief economist Nick Tuffley agreed there had been a case for leaving the OCR unchanged given the state of emergency and that the full damage picture from the cyclone was far from clear.

But he said the impacts of the weather disasters would only make the Reserve Bank’s job of curbing inflation more challenging.

Capital Economics analyst Marcel Thieliant said while the cyclone featured strongly in the bank’s commentary, it didn’t seem to tilt the balance either way in its reset of the OCR.

“Leaving the cyclone aside, the bank sounded less hawkish than in November,” he said.

Tim Kearins, owner of real estate agent Century 21 said rising interest rates would put a lot of pressure on many homeowners this year.

“While it’s far from ideal, it’s important we keep interest rates in perspective. For now, they’re not out of the ordinary,” he said.

Historically, six or seven percent rates have been about the historical average for Kiwi borrowers, and that’s where most fixed rates with the major banks currently sit, he said.