OCR decision: Reserve Bank continues hike path as official cash rate rises by 0.5 points, hits 2 percent

The official cash rate (OCR) has reached 2 percent, increasing by another 50 basis points.

It's now at its highest level since 2016.

Delivering its third monetary policy statement of the year on Wednesday, the Reserve Bank (RBNZ) said the hike was needed to keep price stability and support maximum sustainable employment.

"Consistent with the economic outlook and risks ahead, monetary conditions need to act as a constraint on demand until there is a better match with New Zealand's productive capacity," the statement said.

The RBNZ said economic activity around the world was still creating more inflation pressures.

Russia's invasion of Ukraine and COVID-19 restrictions in China were driving ongoing supply chain disruptions, the central bank said.

"The pace of global economic growth is slowing," the statement said. "The broad-based tightening in global monetary and financial conditions is acting to slow spending growth, accentuated by the high costs of basic food and energy staples."

Overall, the RBNZ said underlying strength remained in New Zealand's economy - but "headwinds are strong".

"Heightened global economic uncertainty and higher inflation are dampening global and domestic consumer confidence. Asset prices, in particular house prices, have also declined, reflecting in part higher mortgage interest rates and increased supply of housing.

"On balance, a broad range of indicators highlight that productive capacity constraints and ongoing inflation pressures remain prevalent. Employment remains above its maximum sustainable level, with labour shortages now the major constraint on production."

RBNZ Governor Adrian Orr.
RBNZ Governor Adrian Orr. Photo credit: File

'Playing the long game'

Sharon Zollner, ANZ's chief economist, told AM ahead of the RBNZ's announcement a 50 basis point jump would be enough.

"The Reserve Bank - I don't think they need to panic," she said. "Yes, inflation is very high but they're clearly getting traction with their rate increases. Just look at house prices - they have fallen in the last five months and the risk of a hard landing for the economy is real."

Zollner said a hike from the central bank might worry households but she was confident wage growth would catch up to inflation later this year. The bank increased the OCR by 50 basis points at its last meeting in April - the largest hike since 2000.

"It does seem quite mean to raise interest rates when households are already under so much cost of living pressure but the Reserve Bank is playing the long game," Zollner said.

"If we were to return to 1970s inflation then allowing that to happen wouldn't be doing households any favours at all."

Sharon Zollner.
Sharon Zollner. Photo credit: File

What's the reaction?

National deputy leader and Finance spokesperson Nicola Willis said the Government needed to put her party's plan in place to fight inflation.

"We've known since last year - well before the Russian invasion of Ukraine - that New Zealand had an inflation problem but the Government's only response has been to put more fuel on the fire with more spending," she said in a statement.

"Now the Reserve Bank has no choice but to increase the OCR, pushing up interest rates across the whole economy and creating more pain for mortgage holders.

"The Government should adopt National’s five point plan to fight inflation - return the Reserve Bank to single focus on price stability, reduce costs on business, remove bottlenecks in the economy, rein in Government spending and prioritise tax relief for workers."

According to the RBNZ, it would also need to increase the OCR earlier and by more than first thought. It's now expected to peak at 3.9 percent in June 2022 and reach around 3.4 percent by the end of 2021.

"The Government hasn't done its job, so now [RBNZ Governor] Adrian Orr is doing his," ACT Party leader David Seymour said. "The problem is, Adrian's way will hurt.

"In case anyone thinks renters are safe from mortgage rate increases, they just have to ask themselves, 'who will pay a landlords' mortgage, if not the tenants?'"

An April Real Estate Institute report said housing sales activity was plummeting and prices were dropping, partly being driven by rising interest rates.

CoreLogic chief property economist Kelvin Davidson said there would continue to be downward pressure on property values.

"A continued low unemployment rate should help to insulate the property market from major downturn to some degree," he said. "But it's still looking likely that the current correction for property values isn't over yet."