Reserve Bank lifts official cash rate by 25 basis points, now sees rate climbing to about 3.4%

Reserve Bank governor Adrian Orr has dramatically increased the bank’s official cash rate track.

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Reserve Bank governor Adrian Orr has dramatically increased the bank’s official cash rate track.

The Reserve Bank has raised the official cash rate by 25 basis points and has increased its expectation of how high interest rates will need to rise in the next few years.

The rate change moves the OCR back to 1 per cent, the rate it was sitting at before the Reserve Bank slashed it to 0.25 per cent in an “emergency cut” near the start of the Covid pandemic in March 2020.

The 25 basis points increase in the OCR was universally expected by bank economists.

But the central bank now sees a need for the rate to rise to about 3.4 per cent by late 2024 to bring down inflation, whereas it had previously been expecting the OCR to peak at about 2.6 per cent.

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Most of the rate rises will be front-loaded, according to its forecasts, with the OCR expected to go over 3 per cent by around the middle of next year.

ANZ chief economist Sharon Zollner warned before the release of the Reserve Bank’s latest monetary policy statement that such an aggressive change in the interest rate track could put pressure on longer-term mortgage rates.

Capital Economics economist Ben Udy described the Reserve Bank’s statement as “hawkish” and continued to query whether rates would in fact rise as high as the central bank now thinks.

“We still think the Reserve Bank will need to cut rates to support the economy next year,” he said, tipping the OCR might not in fact rise much above 2 per cent.

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What does the official cash rate mean?

ASB chief economist Nick Tuffley also described the new OCR forecasts as hawkish, noting the Reserve Bank said the decision on whether to raise the OCR by 25 or 50 basis points had been “finely balanced” and signalled a preparedness to move in bigger steps than 25 basis points if required.

“The statement showed a need to lean much harder against inflation than in the November statement and with some added concern expressed about the risk of high inflation becoming embedded,” Tuffley said.

Retail interest rates were now likely to factor in “some chance over 2022 that the Reserve Bank delivers more than ‘just’ 25 basis points moves at the remaining six meetings of 2022”, he said.

Reserve Bank governor Adrian Orr did not talk up that possibility in a later media conference.

He said the Reserve Bank wanted to maintain “optionality” but had frequent opportunities to reassess the OCR this year and wanted to manage monetary policy “in a way that does not unnecessarily lead to volatility in outputs, interest rates and exchange rates”.

Orr signalled the central bank would also tighten monetary policy by starting to reverse quantitative easing, choosing to sell or not roll-over some of the $54 billion of bonds it had previously bought through the programme.

Inflation was “well above the Reserve Bank’s target range” but would return towards the 2 per cent midpoint target over coming years, he said.

ASB says banks are now likely to factor in some chance of 50 basis points rate hikes into their retail rates.

Stacy Squires/Stuff

ASB says banks are now likely to factor in some chance of 50 basis points rate hikes into their retail rates.

Orr said the pace of global economic growth had slowed due to the “general elevated uncertainty” created by the impacts of Covid and clear signals that monetary conditions would tighten further this year.

But he said there was underlying strength in the New Zealand economy and economic capacity pressures had continued to tighten.

The Reserve Bank gave a nod to the situation in Russia and Ukraine, saying an escalation in tensions would impact New Zealand primarily through “increased risk aversion in financial markets and higher international commodity prices, boosting inflation for our imported goods”.

“If tensions were resolved more quickly than currently expected, this would pose a downside risk to global inflation given the recent moves in international energy prices,” Orr said.

CoreLogic chief property economist Kelvin Davidson said expectations for tighter monetary policy had “to some degree” already been ‘priced in’ to current mortgage rates, but slower and smaller mortgage rate rises were possible.

National Party finance spokesman Simon Bridges said it was clear the economy was overheating and the Government should rein back its spending plans.

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