Reserve Bank of New Zealand Makes Aggressive Cash Rate Hike to 5.25 Percent

Reserve Bank Governor Adrian Orr speaks during a press conference at Parliament in Wellington, New Zealand, on March 26, 2018. Hagen Hopkins/Getty Images

The Reserve Bank of New Zealand (RBNZ) has made its 11th consecutive official cash rate (OCR) hike, up another 50 basis points to 5.25 percent.

This was above the market expectations of a 25 basis point hike and ease its pace of tightening.

The Monetary Policy Committee noted that the recent data, including a fall in GDP in the last quarter of 2022, suggested that the level of economic activity is lower than what was assumed in the previous monetary policy statement.

“Committee members observed that inflation is nevertheless still too high and persistent, and employment is beyond its maximum sustainable level,” they said. “The Committee agreed it must continue to increase the OCR to return inflation to the one to three percent target and to fulfil its remit.”

They added that they were comfortable that current lending rates were keeping a cap on core inflation but noted that wholesale interest rates had actually fallen in recent times.

“As a result, a 50 basis point increase in the OCR was seen as helping to maintain the current lending rates faced by businesses and households while also supporting an increase in retail deposit rates,” they said.

Looking forward, the committee is expecting a continued slowing in domestic demand, the extent of which will determine future monetary policy decisions.

According to the latest data by New Zealand’s official data agency, Stats NZ, inflation remained stubbornly high at 7.2 percent in 2022. The next inflation update for the March quarter will be released on April 20.

The OCR has increased by five percentage points over 18 months.

Walk the Talk

Brad Olsen, the chief economist at Infometrics, said the inflation fight was still the “name of the game” and that the RBNZ was fighting it with “all guns blazing.”

“I think a key part of today’s decision is that there was virtually no market response to the 50bp increase in Feb. One year fixed mortgage rates remain at around 6.50 percent—RBNZ has been talking a big talk and has backed that up with action,” he wrote on Twitter.

Abhijit Surya, the economist for Capital Economics, said the “hawkish” RBNZ would send New Zealand into recession.

National’s finance spokesperson Nicola Willis said the hike was a “punch in the guts” for New Zealand families.

“Mortgage holders up and down the country were holding their breath and hoping for some relief. Instead, they’ve been given another punch in the guts,” she said.

“Around half of New Zealand mortgage holders will be re-fixing their mortgages in the next six months, meaning many will see their interest rates double from three percent or less to more than six percent.”

She added that the rapid pace of the current tightening cycle will leave many “scrambling.”

“Sadly, for too many Kiwis, this will be the punch that sends them off the edge into mortgage arrears, unwanted house sales and financial distress,” Willis said.

Trade Unions Call For Rate Hike Pause

Meanwhile, the New Zealand Council of Trade Unions (NZCTU) said the central bank should pause before considering any further hikes.

“Internationally, inflation is falling in advanced economies,” NZCTU economist Craig Renney said.

“Some Reserve Banks, such as the Reserve Bank of Australia, are holding their interest rates. They have recognised that monetary policy operates with a significant lag, meaning that much of the impact of the increased interest rates have yet to be felt.”

He added that the monetary policy statement made little mention of its impact on employment.

“Unemployment in New Zealand has been rising in recent quarters, and too many New Zealanders are underutilised in the labour market,” he said. “To say that unemployment is above its maximum sustainable level is to accept that tens of thousands more Kiwis must become unemployed.”

Adrian Orr, governor of the Reserve Bank of New Zealand (RBNZ), previously admitted the bank was engineering a recession to lower inflation.

“We are deliberately trying to slow aggregate spending in the economy. The quicker inflation expectations come down, the less work we need to do and the less likely it is that we have a prolonged period of low or negative growth,” he said in November.