OCR: Reserve Bank hikes interest rates by 25 basis points

The Reserve Bank has gone with a smaller Official Cash Rate (OCR) hike of 25 basis points, saying the current level of interest rates is already slowing consumer prices.

As forecast by many economists, the central bank raised its baseline interest rate to 5.5 percent, its monetary policy committee (MPC) said.

However, the OCR would "need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1 percent to 3 percent annual target range, while supporting maximum sustainable employment", the statement said.

"In New Zealand, inflation is expected to continue to decline from its peak and with it measures of inflation expectations. However, core inflation pressures will remain until capacity constraints ease further."

The consensus forecast was for the Reserve Bank (RBNZ) to hike rates by just 25 basis points despite inflation remaining at 6.7 percent in March, down from 7.2 percent in the previous quarter.

ASB had even expected a 50 basis point increase.

But the MPC said inflation was decelerating in part because global supply chain disruptions had eased, leading to a decline in shipping costs. 

"For a number of years, COVID-19 and the war in Ukraine have constrained global production, disrupted supply chains, and increased shipping costs. These global supply bottlenecks have eased and commodity prices - in particular oil prices - have remained below their peaks in early 2022."

Since the end of 2021, the RBNZ has raised rates by 525 basis points.

At its previous meeting in April, the RBNZ raised interest rates by 50 basis points - saying inflation was still too high and persistent.

However, inflation had cooled since the April hike.

"Short-term price pressure from recent severe weather events appears to have been less than initially assumed. Both annual non-tradables and tradables inflation were lower than expected, with a reduction in tradables inflation accounting for a larger share of the overall decline in inflation," the MPS said.

"The constraining impact of higher interest rates has been most visible in spending and economic activity related to housing. Residential investment has started to ease and falling consent numbers suggest it will continue to slow.

"Members were confident that the interest rates faced by firms and households have constrained spending and investment for some time."