Our take on the latest Monetary policy review (Wed 13 Jul 2022)
OCR raised by 50bp to 2.50%
Clear focus on inflation, despite looming economic slowdown
We expect a further 50bp increase in August, then smaller moves
The key numbers...
- The Reserve Bank continued its “resolute” approach to tackling inflation, with a third consecutive 50 basis point increase to the official cash rate (OCR), taking it to 2.5%.
- Bringing aggregate demand back in line with supply capacity is the clear focus for the Bank, despite the risk of an economic slowdown. The Bank noted that “while there are near-term upside risks to consumer price inflation, there are also medium-term downside risks to economic activity. Despite these risks, members agreed that capacity pressures remain pervasive.”
- The Bank is “broadly comfortable” with its expectations outlined in the May Monetary Policy Statement, with a peak near 4% in the OCR, but then with scope to ease monetary policy to a more neutral level once inflation is back under control.
Another 50bp to combat “pervasive inflation pressures”
Official cash rate, end of month
...and our reaction
- The Reserve Bank reinforced its focus on combatting inflation in today’s Review, dismissing concerns about an economic slowdown in favour of a sustained focus on “pervasive inflation pressures”.
- Such clarity is both remarkable and not. Throughout the Review, the focus on inflation is clear, and underscores how much of a stronger view about persistent inflation, and stamping it out, the Bank is now taking compared to early 2022.
- The Bank drew attention to the “unique shocks the economy is currently facing”, which we understand to mean the supply limitations contributing to higher inflation. In doing so, the Bank made it clear that demand has to be reined in until supply is less constrained – despite the economic consequences of squeezing demand lower.
- We forecast a further 50 basis point increase to the OCR in August, after which we expect the Bank to return to 25 basis point increases at the last two reviews in 2022. By 2023, we anticipate that further hikes could be more limited than the Reserve Bank expects, although more persistent strong inflation could yet force interest rates higher.
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