OCR decision: Reserve Bank raises official cash rate by 50 basis points

The Reserve Bank (RBNZ) has delivered its sixth straight interest rate hike in its fourth monetary policy statement of the year.

On Wednesday, the RBNZ raised the official cash rate (OCR) by 50 basis points to 2.5 percent. The bank continued to project the OCR to rise to about the 4 percent mark over the next year.

Ahead of the announcement, most economists had expected another large hike.

"The committee agreed to continue to lift the OCR to a level where it is confident consumer price inflation will settle within the target range," the RBNZ said in its statement. "The committee is comfortable that the projected path of the OCR outlined in the recent May monetary policy statement remains broadly consistent with achieving its primary inflation and employment objectives - without causing unnecessary instability in output, interest rates and the exchange rate." 

The RBNZ said continuing to tighten monetary conditions at pace was appropriate. 

It said it still sees inflation peaking "broadly in line" with the 7 percent prediction it made in May. 

"The committee judged that the global economic outlook has continued to weaken, broadly as anticipated," the central bank said. "The weaker outlook reflects a tightening of financial conditions, ongoing global supply disruptions and rising geopolitical tensions."

OCR decision: Reserve Bank raises official cash rate by 50 basis points
Photo credit: Reuters

'Economic mismanagement'?

The OCR rise comes as the RBNZ tries to navigate volatile economic challenges, including record-high inflation that's driving a cost of living crisis.

And according to Opposition political parties, that crisis was down to "economic mismanagement" by the Labour Government.

National Party deputy leader and Finance spokesperson Nicola Willis said in a statement the Government's "addiction to spending and its unwillingness to fix immigration settings" was worsening the cost of living crisis.

"This dramatic tightening [of the OCR] means anyone due to re-fix their mortgage in the coming months will get hammered by rapidly rising borrowing costs," she said. "Under Labour, a family with a 80 percent mortgage on an average priced home will pay nearly $350 more per week in interest payments today than when Labour came to office."

The Government has consistently dismissed its spending was stoking high inflation, instead blaming global economic factors. That was a view largely shared by RBNZ governor Adrian Orr.

"I think that's far too simplistic and, in fact, wrong in a sense," Orr said in May when asked whether his job was made harder by the Government's spending. "The big picture going on is global inflation pressures and a lack of supply, and that supply constraint is very evident in New Zealand," he told AM.

Adrian Orr.
Adrian Orr. Photo credit: File

What's to come?

Brad Olsen, Infometrics' principal economist, noted the US central bank hiked interest rates by 75 basis points at its last meeting and Canada was expected to deliver the same, suggesting "maybe that's a live conversation" for the RBNZ for future OCR decisions.

"There is, I think, a big conversation that the Reserve Bank will be having internally… around just what magnitude not only this [OCR decision] is but what the next few might look like," he told AM Early. "We know that inflation is still high, we know the pressures on the economy are intense and it's pretty well signalled that the Reserve Bank's going to need to move in those bigger 50 basis point blocks to try and get things under control.

"At the same time, on the other side, you've seen that feeling that consumer confidence is very low - in fact, at record lows… so again, maybe a 25 basis point increase comes into play.

"Realistically, I think the Reserve Bank's got to go for that bigger 50 this time around but all options are on the table for what the next increase might look like - or the next change might look like," Olsen said.

The RBNZ said it would continue "briskly" lifting the OCR until it was confident inflation (at 6.9 percent per the latest figures) could be brought back within the bank's 1-3 percent target.