What economists think of the latest OCR hike

Two bank economists think Wednesday's move on the base interest rate was the right one, and one they expected.

Wednesday, February 22nd 2023, 5:05PM

Their comments follow a 50 point rise in the Official Cash Rate (OCR) from 4.25 % to 4.75 %.

The bank's Monetary Policy Committee said this was needed to ensure inflation returns to within its target range over the medium term.

That target range is 1% to 3%. The current rate is 7.2%

“While there are early signs of price pressure easing, core consumer price inflation remains too high, employment is still beyond its maximum sustainable level, and near-term inflation expectations remain elevated,” the committee said.

In sticking with a 50 point rise, the committee rejected a call for the OCR to stay static to help New Zealand recover from Cyclone Gabrielle and other weather events.

The committee said it was too early to accurately assess the monetary policy implications of these storms, and further, the timing, size, and nature of the Government’s fiscal response was yet to be determined.

In addition, re-building damaged communities could increase inflation because it would need more resources, and might cause wage or price spikes.

ASB chief economist Nick Tuffley said there had been some speculation that the RBNZ would keep the OCR in hold for the time being.

“There was a case for doing so,” he said.

“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.”

In its paper, the RBNZ said the best thing monetary policy could do for the weather crisis would be to free up resources by slowing demand elsewhere in the economy with higher interest rates.

Tuffley added he expected the RBNZ to lift interest rates further, with another 50 point rise in April. But there was a lot of economic activity lying ahead before these things could be certain.

Westpac's acting chief economist Michael Gordon said the RBNZ was clearly grappling with an uncertain environment, even before the impact of Cyclone Gabrielle.

“It still sees upside risks to inflation in the near term. However, it also sees the risks being towards a shorter and sharper downturn in activity, and a more intense impact on household spending as homeowners roll on to higher mortgage rates.”

Gordon said his current forecast was for the OCR to peak at 5.25%. In the coming months, there would be more evidence that higher interest rates were having a restraining effect on demand.

“That would give the RBNZ some comfort that it has done enough to put inflation on a path back towards the 1-3% target range.”

Speaking to journalists after the announcement, Orr said the Monetary Policy Committee considered both a 50 point rise and a 75 point rise before settling on 50, but gave hardly any attention to a 25 point rise.

And he said he expected inflation to rise from 7.2% to 7.3% in this quarter.

“But after that we have projected inflation falling quite rapidly – 5% by year end and under 3% by mid next year.

“We would have said it had peaked now, but it is going to be held up temporarily by one-off price spikes.” Orr said.

But aggregate demand and core inflation which are the things we can most influence will be easing through time.”

The money markets shrugged off the RBNZ move and the dollar was also uninterested. It flickered upwards by one fifth of one cent against the Greenback, before settling back down again.

Tags: OCR