Monetary policy review

RBNZ tells markets to put up or shut up

5 Apr 2023

Brad Olsen

Our take on the latest Monetary policy review (Wed 5 Apr 2023)

OCR up 50 basis points to 5.25%

Mortgage rates have barely changed in 2023, despite previous OCR hike

Change call: We now expect a peak OCR of 5.75% by August 2023

The key numbers...

The Reserve Bank has raised the official cash rate (OCR) by 50 basis points to 5.25%, a move that was double the 25bp rise expected by financial markets and economic forecasters.
The Bank noted that “wholesale interest rates have fallen significantly since the February Statement, and this [decline] could put downward pressure on lending rates.”
The Bank also noted that, despite the fall in economic activity in the December 2022 quarter, “demand continues to significantly outpace the economy’s supply capacity, thereby maintaining pressure on annual inflation.”
The Reserve Bank assessed that, although there have been concerns around financial stability given banking issues in the US and Europe, “there is no material conflict between lowering inflation and maintaining financial stability in New Zealand”.

OCR increases, but will retail rates follow?

Interest rates, %, monthly averages

...and our reaction

We have upgraded our forecast of the peak OCR to 5.75% by August 2023 – since the February Monetary Policy Statement, we had been expecting a peak rate of 5.50%.
As we see it, there’s no evidence yet to assure the Reserve Bank that it’s successfully dampening hot demand, which is still outstripping supply. In fact, today’s Record of Meeting stated that “the Committee is expecting to see a continued slowing in domestic demand and a moderation in core inflation and inflation expectations. The extent of this moderation will determine the direction of future monetary policy.” Without clearer evidence, the Bank will be nervous about taking its foot off the brake too early.
Worldline data today showed that spending in March 2023 was up by 8.3%pa, meaning that with inflation likely running at the similar pace as the 7.2%pa pace in December, real spending is still rising.
The Bank is also clearly worried about inflation expectations remaining higher due to additional price pressures caused by Cyclone Gabrielle, which could feed through into inflation remaining higher for longer still. That concern about inflation expectations means we expect the Bank will want to raise rates further throughout the next few months to keep a clear and persistent message that it's here to win the inflation fight, no matter what.
The lack of interest rate response to the Reserve Bank’s 50bp increase in February means the Bank has put the markets on notice – put up or shut up. Since the start of 2023, one-year fixed mortgage rates have remained around 6.40-6.50%, despite that OCR increase in February. Wholesale rates have declined, and the Reserve Bank clearly doesn’t want its mission undermined, and so has been forced to come out with a more powerful move to lift interest rates more.
The are clear risks now that the Reserve Bank will go too far in raising interest rates and engineer a deeper recession. We cannot fathom that the Reserve Bank would be able to hit pause on interest rate increases within the next 2-3 months after this increase. There’s more OCR raises to come, until such time as there’s some clear evidence of inflation beginning to moderate.

Latest updates

Premium

Monetary policy review

RBNZ tells markets to put up or shut up

The key numbers...

OCR increases, but will retail rates follow?

...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