RBNZ hikes cash rate to 0.5%

The Reserve Bank of New Zealand (RBNZ) today lifted the cash rate from 0.25% to 0.5%, representing the first hike in seven years.

Below is the statement:

The Monetary Policy Committee agreed to increase the Official Cash Rate (OCR) to 0.50 per cent. Consistent with their assessment at the time of the August Statement, it is appropriate to continue reducing the level of monetary stimulus so as to maintain low inflation and support maximum sustainable employment.

The level of global economic activity has continued to recover, supported by accommodative monetary and fiscal settings, and rising vaccination rates enabling a relaxation of mobility restrictions. While economic uncertainty remains elevated due to the prevalent impact of COVID-19, cost pressures are becoming more persistent and some central banks have started the process of reducing monetary policy stimulus.

New Zealand’s public health settings are also evolving as domestic vaccination rates rise. The higher the vaccination rate, the less virus-related disruption there will be to New Zealand’s economic activity over coming years.

The current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement. Capacity pressures remain evident in the economy, particularly in the labour market. A broad range of economic indicators highlight that the New Zealand economy has been performing strongly in aggregate.

While the economy contracted sharply during the recent nationwide health-related lockdown, 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. Recent economic indicators support this picture.

However, the Committee is aware that the latest COVID-19 restrictions have badly affected some businesses in Auckland and a range of service industries more broadly. There will be longer-term implications for economic activity both domestically and internationally from the pandemic.

Headline CPI inflation is expected to increase above 4 percent in the near term before returning towards the 2 percent midpoint over the medium term. The near-term rise in inflation is accentuated by higher oil prices, rising transport costs and the impact of supply shortfalls. These immediate relative price shocks risk leading to more generalised price rises. At this time, measures of core inflation and medium-term inflation expectations remain close to 2 percent.

The Committee noted that further removal of monetary policy stimulus is expected over time, with future moves contingent on the medium-term outlook for inflation and employment.

The RBNZ is among a small group of central banks to start tightening monetary conditions after loosening them a lot at the onset of COVID-19.

By contrast, the Reserve Bank of Australia (RBA) yesterday signaled that rates would be on hold until 2024

The Board is committed to maintaining highly supportive monetary conditions to achieve a return to full employment in Australia and inflation consistent with the target. It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024. Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.

Interesting divergence.

Unconventional Economist
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Comments

  1. What has the RBA got to gain by stating a min timeframe of 2024? Seems unnecessary and irresponsible.

      • If you look at it like that, yeah it would make sense but they’ve had 20% in a year or so, I don’t see why this 2024 timeframe is needed also given their terrible track record. This type of messaging should be called out more often.

  2. In fact the prices of all essentials have gone up a fair bit in the last one year but it never shows up
    in the CPI .The only variables in the CPI calculation formula are the prices of items and their individual weightage, the CPI being a constant!

    • ApotheoticMalaise

      It never shows up? Bro, do you even spreadsheet
      Inflation, in the past 12 months (all in the CPI):
      Domestic and household services: up 74%
      Automotive fuel: 27.3%
      Preschool & primary education: 18.5%
      Furnishing, household equipment and services: 16.9%
      Tobacco: 14.3%
      Beef & veal: 13.5%
      Private motoring: 11.4%
      Medical, dental & hospital services: 6.1%

      edit: that list is almost one-third of the entire CPI basket by weight.

  3. Hugh PavletichMEMBER

    Reserve Bank lifts Official Cash Rate for first time in 7 years to 0.50% as widely expected … Jenee Tibshraeny … Interest Co NZ

    https://www.interest.co.nz/news/112609/reserve-bank-lifts-official-cash-rate-first-time-7-years-05-widely-expected

    Some banks move quickly to raise their floating mortgage rates now the RBNZ has hiked the OCR. Here is where each bank stands … David Chaston … Interest Co NZ

    https://www.interest.co.nz/personal-finance/112614/banks-are-quick-raise-their-floating-rate-now-rbnz-has-hiked-ocr-here-where

    Barfoot & Thompson’s September sales volumes down 40% on September last year, prices also tumble … Greg Ninness … Interest Co NZ

    https://www.interest.co.nz/property/112576/barfoot-thompsons-september-sales-volumes-down-40-september-last-year-prices-also

  4. Hugh PavletichMEMBER

    New Zealand … building its way out of the bubble …

    New Zealand Joins The Exclusive Cash Rate Hike Rise Club … Martin North … Digital Finance Analytics

    https://digitalfinanceanalytics.com/blog/new-zealand-joins-the-exclusive-cash-rate-hike-rise-club/

    New housing production: Is New Zealand, on a population adjusted basis, starting to build more new homes than any other country ? …

    For the month of August 2021 Statistics New Zealand reported …

    Building consents issued: August 2021 … Statistics New Zealand

    https://www.stats.govt.nz/information-releases/building-consents-issued-august-2021

    … extracts …

    • ‘ … In August 2021, the seasonally adjusted number of new dwellings consented rose 3.8 percent, after rising 2.2 percent in July 2021.
    • In the year ended August 2021, the actual number of new dwellings consented was 46,453, up 24 percent from the August 2020 year.
    • In the year ended August 2021, the number of new dwellings consented per 1,000 residents was 9.1, compared with 7.4 in the August 2020 year (check closely Stats NZ excel file Tables 7 and 8 for regional and territorial authority consents rates per 1000 pop pa).
    • In August 2021, 4,490 new dwellings were consented …’

    Annualizing the August dwelling consent / approval volume of 4,490 is 53,880.

    New Zealand’s population clock is 5,147,535. Therefore the August consents figure annualized suggests 10.46 consents per 1000 population per annum.

    It appears New Zealand is now leading on this important measure … building its way ut of the destructive bubble.

  5. The Traveling Wilbur 🙉🙈🙊

    Really surprised the headline for this story wasn’t: “RBNZ DOUBLES CASH RATE!”.

  6. This looks to be nothing more than getting in a couple of rises so they can pretend to have ammo when the next crisis hits. But if you look at where NZ rates were say 6 months ago (pre lockdown) out to 2yrs, it looks like the RBNZ tried to hold the curve down that far out but failed.
    Now the property bubble is well and truly out of control.