Our take on the latest Monetary policy review (Wed 13 Apr 2022)
OCR raised by 50bp to 1.50%
Largest increase in the OCR in 22 years
Will there be more large raises in 2022?
The key numbers...
- For the first time since 2000, the Reserve Bank raised the official cash rate (OCR) by 50 basis points. This more aggressive and decisive step than the conservative 25 basis point increases seen over the last six months takes the OCR to 1.50%.
- Today’s increase is only the fourth time since the OCR was introduced in 1999 that an increase has been 50 basis points – the last was in May 2000, when renowned inflation hawk Don Brash was still Governor.
- The Bank noted that “moving the OCR to a more neutral stance sooner will reduce the risks of rising inflation expectations. A larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic environment”, increasing expectations of further large increases.
- The new “least regrets” view from the Bank is that they need to “increase the OCR by more now, rather than later, to head off rising inflation expectations”.
OCR heading higher
Official cash rate
...and our reaction
- Welcome to the inflation battle, Governor – we’ve been expecting you. Arriving fashionably late, the Reserve Bank’s larger OCR raise today, and a title of “Monetary tightening brought forward”, sends a strong message that the Bank has finally come around to the need for more assertive action to address high inflation.
- The economy is operating beyond its means, pushing inflation higher, so in our minds, the Bank did the only thing it could at today’s announcement. Staring down the barrel of record low unemployment, the highest inflation in a generation, and concerns about unanchored inflation expectations, a 50-point raise had to be implemented.
- Today’s move is a decisive one that puts a shot across the bows of businesses and aims to stop inflation expectations becoming more unanchored. Everyone is on notice that the Bank is willing to make bigger, and possibly unpopular, moves to tame the inflation dragon.
- The Bank noted that “the OCR is [still] stimulatory at its current level”, meaning we’re still adding more fuel to the fires of demand. That fuel must end, and soon.
- The question now is what’s next? There are definitely more increases to come – a significant number of them – but will they be more 50-point hikes, or just the usual 25 basis points? The Bank’s statement gives them ample wriggle room for either option, but our view remains that, to throttle back demand amid a supply-constrained economy, another 50-point hike is warranted at the next review with the possibility of another one in the September quarter.
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