Reserve Bank defends Official Cash Rate hike, says decision reduces need to ‘increase by more later’

The Reserve Bank (RBNZ) has faced criticism from some quarters for embarking on the monetary policy tightening while unemployment is rising.

The New Zealand Council of Trade Unions (NZCTU) said the OCR hike would damage an already weak job market.

“The OCR hike today is not what this country needs,” NZCTU president Sandra Grey said.

But with the inflation rate at 4.1% (well outside the target band of 1-3%), the RBNZ felt it had no choice but to move.

Asked at the press conference if there was a risk that raising the OCR could stall the recovery, Reserve Bank Governor Anna Breman said the focus was always on the inflation mandate.

“Our assessment is that we can bring inflation down while still supporting economic growth and employment,” she said.

Markets had fully priced in today’s hike and high odds of one or even two more this year.

But in the end, the RBNZ’s forecasts proved more or less aggressive – or more dovish – than markets expected.

The RBNZ doesn’t have another rate hike fully priced in until March next year.

ANZ markets strategist David Croy said the market would read the release as being dovish. “It’s not at all pointing to an October hike,” he said.

“They are just being data-dependent. They’re not signalling one way or the other in terms of October, but the track implies less than even odds of an October hike.”

The New Zealand dollar dropped by about 35 basis points to US58.60c in response.

“We see this as an appropriately balanced statement,” Westpac chief economist Kelly Eckhold said.

“The RBNZ remains resolved to adjust the OCR higher – but for now that looks more like a discussion for December as opposed to a discussion that will necessarily occur in both October and December.

“Our current projection of a hold in October and a hike in December remains base case.”

Kiwibank chief economist Jarrod Kerr, who has been most strident in calls for the rate to remain low, said he was encouraged by the decision.

“We are encouraged to see an updated OCR path that meets our view,” he said.

“No big moves, just keep things in stimulatory territory for a little bit longer. Interest rates should remain stimulatory for now, to encourage investment and hiring. The economy needs support, and inflation pressures should ease from here.”

An OCR at 3% or 3.25% is generally regarded as neutral for the economy. Anything lower is stimulatory, and anything higher is contractionary.

Cotality chief property economist Kelvin Davidson said the OCR hike would make little difference to the housing market.

“There’s nothing much here to alter the broad expectation for a further sideways trend in both sales volumes and property values,” he said.

“The mood amongst buyers and sellers certainly remains fairly cautious, and those with mortgages will be wary of the recent interest rate increases on popular terms such as the two-year fix.“

Davidson said floating rates may shift higher after today’s OCR hike but the increase was potentially already priced into fixed rates.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.