Monetary policy review

Birdbrained RBNZ lets inflation run rampant

24 Nov 2021

Brad Olsen

Our take on the latest Monetary policy review (Wed 24 Nov 2021)

OCR raised by 25bp to 0.75%

Six increases expected in 2022, taking OCR to 2.25%

Inflation expected to peak at 5.7%pa in Dec 2021

The key numbers...

The Reserve Bank continued to slowly tighten monetary policy settings, raising the official cash rate (OCR) by 25 basis points to 0.75%.
The November Monetary Policy Statement shows a rapid pace of forecast increases in 2022, with six OCR raises pencilled in, taking the OCR to 2.25% at the end of 2022. At present, the Bank’s forecasts show that the OCR is set to peak at around 2.75% in 2024.
The Bank expects inflation to peak at 5.7%pa in December 2021 and March 2022 and remain above 4%pa, or double the midpoint of the Bank’s target band, throughout 2022. Inflation is then expected to return towards the 2.0%pa midpoint by the end of 2023. The Bank notes that oil, transport, and supply chain issues are all key drivers of inflation, but that these “price shocks risk generating more generalised price rises.”
The Bank notes that “employment is now assessed as being above its maximum sustainable level”, and “near-term risks to inflation are skewed to the upside”, but also highlights the risk that “household spending and business investment will be dampened in the near-term.”

Official cash rate forecasts

Quarterly averages. Source: RBNZ

...and our reaction

Today’s decision to stick to a “considered” 25 basis point OCR increase is birdbrained, and follows on from the Reserve Bank’s speech about its kōtuku-like approach to monetary policy decisions,. Inflation is set to remain higher for longer, at a time when all signs point towards the need to remove emergency monetary stimulus and dampen rampant demand.
Inflation is at its highest in over a decade, the unemployment rate is at record lows, and economic activity is running hotter than expected. With three months until the next OCR review, today was the day for a proactive 50 basis point raise.
However, the Bank doubled down on its spineless approach, stating that “considered steps in the OCR were the most appropriate way to continue reducing monetary stimulus for now” – a clear signal that regular 25 basis point moves would continue, even though this approach risks letting inflation become more entrenched.
The Bank is worried that inflationary pressures might not be sustained, and that economic growth could weaken and lead to reduced labour market pressures in 2022 as New Zealand learns to live with COVID-19 in the community. However, actual inflation and expectations for further price increases are here right now. Given the lag of nine months or more before monetary policy changes have real effects, we believe it is important to act now to prevent higher inflationary expectations becoming even more embedded.
The Bank’s forward OCR track shows a busy year in 2022, with six raises (out of seven reviews) pencilled in. We expect that the Reserve Bank might need to pause at some point to assess the effectiveness of its changes, but the lack of action now raises the chance of needing even faster rate rises during 2022.

Latest updates

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Monetary policy review

Birdbrained RBNZ lets inflation run rampant

The key numbers...

Official cash rate forecasts

...and our reaction

Latest updates

OCR up for first time in three years, as expected

Split decision keeps OCR at 2.25% for now

Reserve Bank holds at 2.25%, but watches vigilantly

OCR on hold, but set to lift slightly quicker