Monetary policy review

Drinks break? RBNZ thinks it has done enough

24 May 2023

Brad Olsen

Our take on the latest Monetary policy review (Wed 24 May 2023)

OCR up 25 basis points to 5.50%

MPC considered 25bp or no change - voted 5-2 to raise

RBNZ's current forecast is for no more rates rises

The key numbers...

The Reserve Bank raised the official cash rate (OCR) by 25 basis points to 5.50%, in line with out forecasts, but adopted a weaker-than-expected tone around the future need for further increases.
The OCR is now forecast to have peaked at 5.50%, but the Bank doesn’t expect to adjust the OCR again for more than a year, until the September 2024 quarter. From that point, it expects to cut the OCR, slightly more sharply than it had been predicting in its February Statement (see our chart below).
The Monetary Policy Committee discussed two options at the May review – no change or a 25bp increase. The decision to go with a 25bp raise was decided by a majority vote of 5-2, the first time the Committee has ever put a monetary policy decision to a formal vote.
The Committee “agreed that neither decision would cause unnecessary instability in output, interest rates, or the exchange rate”, and that although “monetary policy is having a moderating effect on demand at this point in time, a 25 basis point increase in the OCR will increase confidence that inflation falls back to the midpoint of the target band.”
The consideration of a pause was due to a view that monetary policy is having the desired effect of slowing demand and reducing inflation. The Bank stated that “a pause would also allow more time to assess the impact of the significant tightening, and the timing of any further increase that might be needed.”
The Bank is now forecasting a two-quarter recession in the middle of 2023 (which is smaller than its previous forecast), and for inflation to moderate more quickly. Annual inflation is set to be at 4.9%pa by the end of 2023 and 2.5% by the end of 2024.

Final OCR raise for now as RBNZ hits pause

OCR, quarterly averages, RBNZ forecasts

...and our reaction

The Reserve Bank has made a final push and now hit pause on further changes to the OCR. We’ve had to adjust our expectations to suit this view, moderating our position from a peak OCR of 5.75% to the current level of 5.50%. We now expect the Reserve Bank will pause until at least the last few months of 2023 to assess how the economy and inflation evolves, before deciding if any further interest rate increases are required.
The signal from the Bank is very clear – it thinks it has done enough to get inflation back under control, and now wants to wait and assess the situation as previous OCR hikes filter through the economy. Instead of a 25 vs 50bp increase being tossed up, the Bank discarded a 50bp raise, and mulled over a 25bp increase or no change.
The fact that the Monetary Policy Committee actually put the decision to a vote for the first time is notable, as is the fact that two of the seven members definitively wanted to pause right now. That’s a clear signal of a firmer view of no further raises for now.
We can’t see that the Bank will have any considerably detailed information, or changing trends, in the economy until late in 2023 to make a well-informed decision about whether previous OCR increases are adequately cooling demand and inflation or not. By November, we can envisage that the Bank might need a final push if it is not satisfied with the progress in moderating inflation.
We cannot rule out the Reserve Bank needing to move more quickly if signs of further moderation don’t occur fast enough – but it’s not our central view. The challenge we have is that the Reserve Bank’s tone has been more unpredictable recently. In November 2022 the Bank took a stronger stance; in February a weaker stance; in April a stronger stance; in May a weaker stance and a likely pause. The lack of consistency in forward views by the Bank underscores the continued up and down reactions in the markets as try to decode what the Bank is saying, what they’re intending to do, and what they actually end up doing.

Latest updates

Premium

Monetary policy review

Drinks break? RBNZ thinks it has done enough

The key numbers...

Final OCR raise for now as RBNZ hits pause

...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