Monetary policy review

Sensible OCR increase by RBNZ

22 Feb 2023

Our take on the latest Monetary policy review (Wed 22 Feb 2023)

OCR up 50 basis points to 4.75%

Peak OCR of 5.50% unchanged, but occurs slightly later

We expect three further 25bp increases by mid-2023

The Reserve Bank again increased the official cash rate (OCR) by 50 basis points, in line with our recent change in expectations.
The Bank still mulled a 75-point increase, before deciding that although “the balance of risks around inflation remain skewed to the upside, the extent of this risk had moderated somewhat since” November.
The forward track for the OCR remains essentially unchanged, with three further 25-point increases expected in 2023 to take the OCR to a peak of 5.50%.
The Bank made it clear that inflation is still too high, and that although there were encouraging signs coming through in the data, there remains an imbalance between demand and supply that needs to be reduced to tame inflation.
The Reserve Bank continues to forecast a recession, with a 1.1% peak-to-trough fall in economic activity across the June, September, and December 2023 quarters.
The Reserve Bank slightly moderated its near-term outlook for inflation to reflect the most recent inflation result, and also to account for the government’s extension to the fuel tax subsidy. However, the pathway for inflation going forward remains in line with the Bank’s prior expectations, with inflation forecast to be back within the Bank’s 1-3%pa target band in the second half of next year.

Official cash rate forecasts, quarterly averages, RBNZ forecasts

Today’s 50bp lift is a sensible decision, as is the Bank’s forecast that further interest rate increases are needed to bring inflation back under control. The inflation fight is not over yet. Despite noting that there are more encouraging signs around inflation, the fact that the Bank’s OCR track is almost exactly the same as in November 2022 confirms that there’s still work to be done.
It will take time for inflation to pull back to a slower and more manageable rate, and the Reserve Bank will be wary of taking its foot off the brake until inflation is well and truly moderating. Further, it will want to keep inflation expectations in check too, which requires further interest rate hikes.
In our reading of the Statement, it’s clear the Bank thinks that interest rate increases to date have helped stabilise inflation, albeit at a high rate, and that as further interest rate increases work their way through the system, inflation and importantly inflation expectations will moderate.
The Bank noted the potential inflationary effects of Cyclone Gabrielle due to supply chain disruption and rebuilding requirements, but outlined the need to look past these short-term effects. There is considerable uncertainty about the medium-term effects of the cyclone on the economy, but the Bank correctly stated that “the Government’s fiscal policy response would be more effective” at addressing the regional impacts of severe weather events.

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