RBNZ increases Official Cash Rate to 5.25% to curb inflation

RBNZ raises OCR by 50 basis points to address persistent inflation and emerging signs of capacity pressures in New Zealand economy

Community Press
April 05, 2023
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Economic activity over the December quarter was lower than expected, but demand still outpaces supply capacity, putting pressure on inflation

The Reserve Bank of New Zealand (RBNZ) has increased the Official Cash Rate (OCR) today by 50 basis points from 4.75% to 5.25% to combat rising inflation. The Monetary Policy Committee (MPC) said the OCR increase is necessary to return inflation to the 1-3% target range over the medium term, as inflation remains too high and persistent while employment is beyond its maximum sustainable level. The MPC acknowledged that economic activity over the December quarter was lower than anticipated, but demand still significantly outpaces the economy’s supply capacity, putting pressure on annual inflation.

Key takeaways:

The OCR increased by 50 basis points from 4.75% to 5.25%
The rise in OCR is necessary to bring inflation to the 1-3% target range over the medium term
Inflation is still too high and persistent, while employment is beyond its maximum sustainable level
Economic activity over the December quarter was lower than expected, but demand still outpaces supply capacity, putting pressure on inflation
The recent severe weather events in the North Island have led to higher prices for some goods and services, increasing the risk that inflation expectations persist above the target range
Global growth is expected to be below average, contributing to lower demand for New Zealand's key commodity exports
New Zealand's economic growth is expected to slow through 2023, given the slowing global economy, reduced residential building activity, and ongoing effects of the monetary policy tightening to date
The RBNZ's financial system is well-positioned to manage through a period of slower economic activity

According to RBNZ, the Committee agreed that maintaining the current level of lending rates for households and businesses is necessary to achieve this, along with a rise in deposit rates. New Zealand’s financial system is well positioned to manage through a period of slower economic activity. The Committee’s assessment is that there is no material conflict between lowering inflation and maintaining financial stability in New Zealand, and tightening monetary policy now to reduce inflation improves the outlook for financial stability by limiting the need for even higher interest rates in the future.

Looking ahead, the MPC is expecting a continued slowing in domestic demand and a moderation in core inflation and inflation expectations, and the extent of this moderation will determine the direction of future monetary policy.

Meanwhile the Green Party said in a tweet that the government's refusal to use deflationary measures such as excess profits taxes on banks, or wealth taxes on those who profited handsomely through the global pandemic, are choices.

"RBNZ OCR rise will cause unnecessary & disproportionate pain for lower income NZ households", Green Party said.

The Govt’s refusal to use deflationary measures such as excess profits taxes on banks, or wealth taxes on those who profited handsomely through the global pandemic, are choices.

Today's RBNZ OCR rise will cause unnecessary & disproportionate pain for lower income NZ households.
— Green Party NZ (@NZGreens) April 5, 2023

National Party leader Christopher Luxon said that many people will be broken after the RBNZ's decision to increase OCR.

"Let's be clear, we're breaking a lot of New Zealanders tonight ... There's going to be a huge amount of pain. You just think about it, a $400,000 mortgage - you're now paying an extra $300 a week," he told the AM Show.