The Northern Express Herald

How the oil shock is keeping the OCR guessing game alive - The Front Page

The OCR is our main tool for keeping inflation between 1% and 3%.
NZ Herald business editor at large Liam Dann is with The Front Page to talk through the OCR call, the growing uncertainty around it, and what comes next for borrowers.

All eyes are on the Reserve Bank this week, as it prepares to make its latest call on the Official Cash Rate.

Just weeks ago, a hike looked likely.

But as the Reserve Bank (RBNZ) is set to release its July Monetary Policy Review at 2pm on Wednesday, that once-simple story has become a lot more complicated.

The Official Cash Rate currently sits at 2.25% after it was held in May, when the Monetary Policy Committee expected inflation to rise from 3.1% to peak at 4.3% in the September quarter.

It is expected that inflation will return to a 2% target in mid-2027.

The big banks are split on the upcoming decision. ASB, Kiwibank, BNZ, and Westpac reckon RBNZ will hold the OCR.

However, ANZ expected the OCR to be raised by 25 basis points to 2.50%.

Kiwibank economists cite a rapid decrease in oil prices and a stabilising situation in the Middle East, lowering the medium-term risk, supporting a hold in July.

ANZ economists said it’s sensible to get a hike under the belt, despite the sharp fall in oil prices.

NZ Herald business editor at large Liam Dann told The Front Page that a big part of the debate is the recent fuel price shock.

“People will have hopefully started to notice that petrol prices are starting to come down. The global oil price has come down a lot, and as petrol prices come down, that’s good news for inflation.

“But the Reserve Bank has to make a call about how much of this inflation will just disappear along with the oil shock, how much of it’s just a one-off supply side event, or how much that’s going to keep flowing through the economy.

“Everybody thinks inflation’s going to hit 4.2% – or something like that – for that second quarter we’ve just been through. We understand that. We all paid more at the petrol pump. But will it stay elevated through the third and fourth quarters, or will it ease away?

“And then you’ve got to go, well, if it eases quickly, does that mean you can afford to keep rates lower or not move as quickly? Or does the New Zealand economy pick up because of the lower inflation?

“Then if the New Zealand economy picks up, then you need to raise rates as well because you’ve got more activity and more inflation coming out of the core engine room of the economy. So there are all these variables, and the economists have quite different views,” he said.

Listen to the full episode to hear more about:

  • The wage spiral worry.
  • Boring is good.
  • Green shoots, but no harvest yet.
  • Stuck in a cost-of-living era.

The Front Page is a daily news podcast from the NZ Herald available to listen to every weekday from 5pm. The podcast is presented by Chelsea Daniels, an Auckland-based journalist with a background in world news and crime/justice reporting who joined NZME in 2016.

You can follow the podcast at iHeartRadio, Apple Podcasts, Spotify or wherever you get your podcasts.