RBNZ raises official cash rate by 25 basis points to 2.75 percentThe rate rise followed a similar-sized rise in July and was widely expectedThe monetary committee says inflation has likely peaked and a economic recovery is likely to gain paceA recovering economy does not need same stimulation of low cash rateAt least one more rate rise is expected this year – future rises will be guided by numbers and global eventsFurther rate rises are expected next year
The Reserve Bank has raised the official cash rate (OCR) for a second meeting in a row to tackle inflation pressures, and has signalled more increases could be coming this year.
The Monetary Policy Committee raised the benchmark rate by 25 basis points to 2.75, percent following a similar sized rise in July.
The move upwards was widely predicted by economists.
The committee said inflation had surged because of the Middle East war, but discounting the spike in fuel prices was on the way down.
“Excluding vehicle fuels, annual CPI inflation decreased to 2.9 percent in the June quarter. Most measures of core inflation are within the 1 to 3 percent target band.”
It said higher fuel prices would drop out of the annual inflation calculation, and along with the slack in the economy and gradual rises in the OCR then inflation would hit the desired 2 percent rate by the end of 2027.
It said the economy has shown signs of recovery after being knocked off track by the US-Iran conflict.
“After lacklustre growth in the June quarter, New Zealand’s economic recovery has most likely resumed, but remains uneven.”
It said strong exports were boosting incomes and investment in parts of the economy and in the regions, which was being offset by weak income growth, job insecurity and flat house prices which were weighing on household spending.
The committee said global events posed risks to recovery and tackling inflation and would be a factor in setting rates.
But it signalled further rate rises to come.
“The committee judges that gradually removing monetary stimulus is appropriate to return inflation to the 2 percent target mid-point while supporting growth and employment.
“Future policy decisions will depend on the committee’s judgement of the balance of risks to medium-term inflation.”
The committee has two further meetings this year, in October just before the election and December.
Interest rate guidance in the statement suggested at least one more 25 basis point rise to 3 percent by year end, and possibly two more rises by the middle of next year.
‘Positive news for New Zealanders’
Finance Minister Nicola Willis told media at Parliament that the central bank’s statement showed the “economic recovery broadening” and that job creation and consumer confidence was looking to strengthen in the coming months.
“That is positive news for New Zealanders who are looking forward to more prospects in the months ahead, although we fully acknowledge that the uncertainty in the Middle East is impacting inflation and will remain with us potentially for some time.” she
Willis said banks had previously lifted their interest rates in anticipating of OCR hikes but it was important banks “don’t get too far ahead of themselves” and “bring on more difficulties to the economy”.
“Anyone who’s got a mortgage doesn’t want to be paying more interest on their mortgage – it’s that simple – you don’t need to be a chief executive to work that out.” she said.
She said she was “very satisfied” with her government’s policies aiming to grow the country’s economy and New Zealander’s were “smarter than some of my opponents give them credit for”.
“They know that it’s not for Chris Luxon to tell Donald Trump to get out of the Middle East because it’s affecting inflation and interest rates here at home, those are decisions for Donald Trump, not for us.
“We need to control what’s in our control and we will continue to do so.” she said.
ACT leader David Seymour put the blame for rate hike squarely on the “catastrophe” of the Iran War and said it would be a “double catastrophe” if Labour were in power at the same time.
Asked if he feared a “Halloween hike” in October, Seymour said the prospect was “spooky” but ultimately up to the Reserve Bank.
“Standard and Poor has visited, they spoke to a lot of people about the New Zealand economy and they said they’re going to put us AA+ with a stable watch.
“That’s a very positive thing and so let’s see where the Reserve Bank gets to at Halloween, but hopefully they’re not going to spook the markets or the election for that matter,” he said.
‘We like it’
Economists broadly regarded the statement as softer or more ‘dovish’ than expected, based on the gradual and little changed track for the OCR.
Kiwibank chief economist Jarrod Kerr, a long standing backer of no rate changes to support the economic recovery, was heartened by the decision.
“We like it. Given where we’ve been, and where we’re likely to go, slightly lower interest rates that don’t move above a neutral setting, is good news.”
He expected one more rise to 3 percent by year end and then a prolonged pause.
ASB senior economist Mark Smith said the central bank decision was the line of least resistance, but it clearly remained wary of inflation risks, and global uncertainty.
He maintained for now ASB’s previous forecast of two hikes this year, and m ore next year.
“We expect 25 basis point hikes in October to 3.0 percent and December, with the OCR ending the year at 3.25 percent, which we adjudge to be at broadly neutral levels.”
He said the RBNZ might look to increase rates more slowly than expected depending on events and data.
The perceived softness of the statement and unchanged rate track hosed down expectations of the cash rate hitting 4 percent, as some economists were forecasting.
That led to the New Zealand dollar falling nearly half a cent against the US dollar as financial markets reduced the bets on higher interest rates.