OCR unchanged as economic outlook continues to improve

The Reserve Bank confirms the Official Cash Rate remains at 0.25 percent.
The Reserve Bank confirms the Official Cash Rate remains at 0.25 percent. Photo credit: File/Getty.

The Official Cash Rate is unchanged at 0.25 percent, the Reserve Bank has confirmed.

In a monetary policy review on Wednesday, the Reserve Bank said the global outlook continues to improve and strong global demand is supporting higher commodity export prices. 

But health risks and uncertainty around COVID-19 remain, affecting business and consumer confidence.

Housing measures announced by the Government on March 23 aimed at cooling investor demand would likely have a dampening effect on house prices. The impact on house price growth will take time to show, it said. No further tools to control house prices were announced. 

In its February monetary policy statement, the Reserve Bank forecast annual house price growth to slow, from 22 percent in mid 2021, to 5.6 percent in 2023.  

As part of its mandate to control house price growth, the Reserve Bank was asked to consider a debt-to-income cap to limit the amount buyers can borrow. Fisher Funds senior portfolio manager David McLeish understands this is in the pipeline.

"The Reserve Bank still needs to be given the green light...that's likely to be more a May/June announcement," McLeish said.

Confirming wholesale interest rates have risen this year, McLeish said the Reserve Bank is balancing a gradually improving global economic outlook against ensuring interest rates stay low in the short-term and don't rise in a disorderly fashion.

"We've seen markets move to price in an expectation of a hike - or part of a hike - by the end of the year...you're really not talking till another year away from now until there's a full 25 basis point priced into the market," McLeish said.

Kiwibank chief economist Jarrod Kerr said in line with Kiwibank's forecast, financial markets were pricing for the OCR to rise by quarter of a percent, from 0.25 percent to 0.5 percent in November 2022. 

ASB senior economist Chris Tennent-Brown still expects the OCR to remain on hold until August 2022.  

Supply chain disruptions and higher oil prices are putting pressure on consumer price inflation. In the short-term, there will be periods where it will rise above 2 percent. As cost shocks and demand pressures affect consumer prices, ASB expects annual inflation to be close to 2.5 percent at the end of this year.

But the Reserve Bank is focusing on the longer term. It's keeping the wholesale cash rate on hold until further signs of economic recovery appear and it's confident annual consumer price inflation can be sustained at or near its 2 percent target.

The Large Scale Asset Purchase (LSAP) programme and Funding for Lending (FLP) programme remain unchanged, keeping interest rates low.