RBNZ implements another big jump in the base interest rate

The Reserve Bank (RBNZ) has pushed up the Official Cash Rate (OCR) by 50 basis points.  It now stands at 2.5%.

This is the third time in succession that the bank has moved with such determination, with 50 point rises being double the usual rate of 25 points up or down.

The rise matched the expectations of the market, with bank economists united in believing that a large rise was inevitable.

That is because the RBNZ is still supposed to keep inflation between 1% and 3% and the current level of 6.9% is way outside those constraints.

And there are fears inflation will rise still higher, when the CPI for the June quarter is unveiled next week.

In a statement that accompanied today's announcement, the RBNZ Monetary Policy Committee said it remained appropriate to continue to tighten monetary conditions at pace to maintain price stability and support maximum sustainable employment.

And it was resolute in its commitment to return price inflation to within the 1 to 3 percent target range.

“The level of global economic activity, combined with the ongoing supply disruptions largely driven by both COVID-19 persistence and the Russian invasion of Ukraine, continue to generate global inflation pressures,” the committee said.

While there were signs of slowing global growth, domestic spending remained high in New Zealand, supported by high employment levels, resilient household balance sheets in aggregate, continued fiscal support, and strong terms of trade.

“In these circumstances, spending and investment demand continues to outstrip supply capacity, with a broad range of indicators highlighting pervasive inflation pressures,” the bank said.

Not a lot of other information came out, since this was a Monetary Policy Review, not a Monetary Policy Statement. In other words, this was a re-set of the OCR without oceans of deep analysis to accompany it.

In an initial response, the chief economist for the ANZ, Sharon Zollner, said the rise was much as expected and was consistent with earlier remarks from the RBNZ.

“It was very much as we were expecting,” she said.

Zollner is still expecting the OCR to peak at 3.5%, below the RBNZ's own forecast, due to consumption and construction slowing more quickly than the Reserve Bank was predicting.

“But the next key bit of data is the CPI on Monday and that could change the picture quite a bit.”