Official cash rate: Politicians react to latest double-hike by Reserve Bank

The Opposition has blasted Government spending after the latest lift to the official cash rate (OCR), but the Finance Minister has said interest rates are rising globally and that he believes the Government's recent Budget was "carefully balanced".

The Reserve Bank on Wednesday raised the OCR to 2 percent, up 50 basis points, in the face of 30-year-high inflation. That takes the cash rate to its highest point since mid-2016 and means a likely rise in mortgage rates.

In a statement, the RBNZ's Monetary Policy Committee said the double-hike was appropriate to maintain price stability and support maximum sustainable employment, two of the bank's remits. 

"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," it said.

"A larger and earlier increase in the OCR reduces the risk of inflation becoming persistent, while also providing more policy flexibility ahead in light of the highly uncertain global economic environment."

The committee said the ongoing supply chain issues caused by COVID-19 and the Russian invasion of Ukraine are exacerbating inflation pressures. Domestic inflation pressure is being driven by housing, including the cost of construction.

The National Party's finance spokesperson Nicola Willis said the 50 basis point shift would mean "more pain on the horizon for anyone with a mortgage". 

"Rising interest rates will be difficult news for Kiwis already battling the cost of living crisis. This is the first time ever the Reserve Bank has increased the OCR by 50 basis points twice in a row, reflecting just how severe inflation has become," she said.

"A family with a $700,000 mortgage is on the hook for $14,000 more a year in interest than this time last year. If, as KiwiBank expect, mortgage interest rates rise to at least 6 percent, a Kiwi family with a $700,000 mortgage will be paying at least $42,000 in interest a year - around $800 a week in interest alone."

National and ACT continue to blame Government spending for contributing to the record inflation. 

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

"Kiwi families are facing record prices for everything they buy, while their mortgage rates are increasing as the Reserve Bank makes up for the Government's out of control spending."

Seymour raised concerns that mortgage rate increases will lead to a jump in rents.

Both parties are continuing to push for tax relief. National wants to adjust the income tax thresholds to inflation, while ACT wants to simplify the tax system by creating only just two tax thresholds. 

The Greens have said high levels of inflation affect people differently, often meaning low-income families struggle to pay rent and put food on the table. 

"RBNZ is stuck between a rock and a hard place now because of the action they took during the pandemic, so it’s important to review the economic response to COVID-19, both positive and negative, of the Government and the RBNZ," finance spokesperson Julie Anne Genter said.

"An inquiry would provide insights for the remaining stages of this pandemic and help the Government respond to current and future economic challenges.

"The Government's reliance on the Reserve Bank's lowering of interest rates to boost demand in the economy has had the unwanted side-effect of pushing up house prices across the country. The combination of monetary and fiscal policy led to the biggest transfers of wealth to the richest New Zealanders, who still do not pay their fair share of tax."

Finance Minister Grant Robertson.
Finance Minister Grant Robertson. Photo credit: Newshub.

At last week's Budget, the Government unveiled a $1 billion cost-of-living package, which included $350 payments to Kiwis making under $70,000 and not receiving the Winter Energy Payment, as well as extensions to the cut to fuel excise duty and public transport fares. 

The Monetary Policy Statement (MPS) released on Thursday said the committee had "noted" Budget announcements. 

"It was agreed that fiscal policy is currently supporting economic activity, but that this stimulus is expected to reduce in coming years. The current level of fiscal spending is contributing to a modest increase in demand. 

"This is expected to diminish over time as a result of the end to the large, broad-based, fiscal support packages the Government delivered during the initial phase of the COVID-19 economic response."

Finance Minister Grant Robertson said the decisions made by the Reserve Bank are independent to the Government, but he recognises "higher mortgage rates will add to cost of living pressures for New Zealanders". 

He said the Government had "produced a carefully balanced Budget".

"[It] provides temporary and targeted support to meet cost of living pressures, long term investment to sustainably grow the economy and keeps a lid on debt and reduces government spending to below 30 percent of GDP, around the long term average.

"The New Zealand economy is resilient. As the Reserve Bank said today household balance sheets and employment are strong and our banks are well capitalised. As recognised recently by the IMF, our strong foundations and the way we have dealt with COVID give us as good a base as any country to get through this challenging time."

He also said that central banks around the world are responding to rising inflation by raising interest rates. 

"Britain's inflation rate is 9 percent, the US is at 8.3 percent and New Zealand is in the middle of the pack at 6.9 percent. And like their counterparts, the Reserve Bank has clearly signalled the direction they are going to get inflation back towards its target band of 1-3 percent by the second half of 2023."

The MPS set out the RBNZ's forecasts for both the OCR over the next three years as well as inflation - the Consumer Price Index. 

It has pushed up its OCR track, expecting it to peak at 3.9 percent over 2023 and early 2024, before starting to slowly reduce. The February MPS didn't have the OCR getting to 3.4 until September 2024.

On CPI, the RBNZ expects it to peak at 6.9 percent in 2022, before falling to 4.4 percent in 2023, 2.5 percent in 2024 and 2 percent in 2025. The RBNZ's target range is between 1 and 3 percent. That's a more optimistic projection than what was forecast in Treasury's Budget Economic and Fiscal Update, which had CPI not falling below 3 percent until 2025.