Our take on the latest Monetary policy review (Wed 23 Feb 2022)
OCR raised by 25bp to 1.00%
OCR set to peak at or above 3% in mid-2024
Inflation now expected to peak at 6.6%pa in March 2022
The key numbers...
- The Reserve Bank raised the official cash rate (OCR) by a conservative 25 basis points to 1.00%, further tightening monetary policy settings – albeit leaving the OCR at highly stimulatory levels.
- The Bank noted that “headline CPI inflation is well above the Reserve Bank’s target range, but will return towards the 2 percent midpoint over coming years”, with a peak of 6.6%pa expected in March 2022 before slowing largely along the same track as forecast in November.
- The Bank’s forecasts for the OCR this year are largely in line with what was published last November, but with further increases in 2023/24 taking the OCR above 3.0%. The Large Scale Asset Purchase (LSAP) programme will also be reduced over time, but the Bank stated that the reduction should (among other things) seek to “have minimal impact on monetary policy.”
- The Bank now expects house prices to be declining by up to 5.4%pa by the start of 2023 due toa range of factors.
RBNZ expected to raise OCR further
Official cash rate (OCR) forecast track. Source: RBNZ Monetary Policy Statements
...and our reaction
- The Reserve Bank’s still-cautious and conservatively small increase of 25 basis points is too little, too slow. Inflation is not taking the slow lane – it’s going hell for leather. Our view is that the Reserve Bank has lost control of inflation, with actual costs spiralling higher, inflation expectations rising, and much less pricing discipline across the economy than over the last three decades.
- Our interactions with households and businesses show they expect inflation to remain higher for longer, and the Bank’s own forecasts show peak inflation nearly a percentage point higher than predicted as recently as November. We remain unconvinced that inflation will settle back quite so fast, given the pressures we expect to persist in the economy.
- The Bank has noted that “employment is now above its maximum sustainable level”, that “the New Zealand economy continues to perform above its current potential”, and that “headline CPI inflation is well above the Reserve Bank’s target range.” These pressures are causing real challenges to New Zealand households and businesses and demand stronger action than the Bank has taken to date.
- The Bank appears to be more open to a larger OCR increase in 2022, noting “the Committee also affirmed that it was willing to move the OCR in larger increments if required over coming quarters.” It deliberately moved away from its language in November that “the Committee judged that considered steps in the OCR were the most appropriate way to continue reducing monetary stimulus for now”. We expect they’ll need to raise by 50 basis points before mid-2022.
- We worry that without more decisive action, given the incredibly tight labour market, New Zealand could see a price-wage spiral upwards.
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