Our take on the latest Monetary policy review (Wed 6 Oct 2021)
OCR raised by 25bp to 0.50%
Further raises signalled
High vaccination levels mean virus-related economic disruption
The key numbers...
- The Reserve Bank increased the official cash rate today by 25 basis points, from 0.25% to 0.50%, with “further removal of monetary policy stimulus … expected over time” as long as the outlooks for inflation and employment remain elevated.
- The Bank noted the stronger starting position for the economy, and that “current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment”, with inflation still high and employment at its maximum sustainable level.
- Vaccines have been highlighted as critical to New Zealand’s economic outcomes, with the Bank stating that the “higher the vaccination rate, the less virus-related disruption there will be to New Zealand’s economic activity over coming years.”
Inflation expected to head higher
Annual CPI inflation, RBNZ forecasts
...and our reaction
- Raising the OCR starts to move New Zealand away from the emergency levels of support that were introduced at the start of the pandemic, when there were concerns that the unemployment rate would rise to double digits and there could be a prolonged recession.
- Substantially better economic conditions persist, with inflation rising and the labour market tight. The economy still needs support, but this support is coming from more targeted fiscal support rather than the monetary support of super-low interest rates.
- Concerns had been expressed over the economy’s future path given changes to New Zealand’s pandemic response. The Reserve Bank’s comments about high vaccination rates leading to lower economic disruption align with our thinking that the economy remains in a strong place, and that the current outbreak doesn’t fundamentally undermine our economic path.
- Inflation pressures continue to build, and could be more persistent, and capacity pressures are abundantly clear, meaning the labour market will remain tight. With these hotter conditions remaining, we expect the Reserve Bank to continue removing support over the next couple of years. If inflation is substantially higher than expected before the next review on 24 November, there is still a chance of a 50-basis point rise.
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