RBNZ Hiked Policy Rate for First Time in 7 Years

Central banks news

For the first time in 7 years, the RBNZ increased the OCR by +25 bps to 0.5% in October. Policymakers pledged to tighten further in coming months as inflation pressure continues to exceed target. Policymakers remained hopeful about the economic outlook, suggesting that easing of pandemic-related restrictions could help return growth momentum.

On economic developments, the central bank acknowledged “elevated” economic uncertainty as a result of the pandemic. Yet, it remained optimistic about the longer-term outlook. As noted in the statement, “household and business balance sheet strength, ongoing fiscal policy support, and a strong terms of trade provide confidence that economic activity will recover quickly as alert level restrictions ease”.

Policymakers also took note of the “persistent” cost pressure in the near-term due to labor shortage and supply chain disruption. They projected headline CPI to rise above +4% in the near-term before returning towards the +2% midpoint over the medium term. They also indicated that the near-term price pressure has mainly been driven by the supply side shortage: higher oil prices, rising transport costs and the impact of supply shortfalls. Such pressures should prove temporary and be alleviated in the medium term.

The rate hike was widely anticipated. Policymakers also affirmed that further removal of monetary policy stimulus is expected over time, contingent on the outlook of inflation and the job market in the medium term. While the another rate hike in November is likely, the rate cycle could be gradual as inflation tames in the medium term. With restrictive measures eased and border control relaxed, labour shortage and supply chain problem could be relieved.