WELLINGTON: The NZ Monetary Policy Committee today increased the Official Cash Rate (OCR) from 3.5 percent to 4.25 percent. The rate hike aimed at controlling inflation between 1%-3% is likely to depress house prices by 20% in 2023, RBNZ said.
The RBNZ rate hike is likely to have a catapult effect on mortgage interest rates and business loans, private sector lending might see a trough in 2023, as a result.
However, the rate hike is likely to make economy go into a recession and reduce spending for a few quarters in 2023 till 2024, RBNZ expects. However, it might also curtail spending and inflationary trends well before the upcoming election in 2023.
The OCR is likely to remain high in all of 2024, which is likely to contract business expansions and investments.
Current CPI inflation stands at about 7% which RBNZ wants to bring down to 1%-3% mark. However, with global inflation in commodity prices, it is unlikely that inflation can be curtailed in a short term.
The Committee agreed that the OCR needs to reach a higher level, and sooner than previously indicated, to ensure inflation returns to within its target range over the medium term. Core consumer price inflation is too high, employment is beyond its maximum sustainable level, and near-term inflation expectations have risen.
“Food and energy prices, and persistent core inflation, have combined to create very high headline inflation in many countries. Central banks are tightening monetary conditions in an effort to slow spending and reduce inflation pressure,” RBNZ said.
In New Zealand, household spending remains resilient, especially considering the rise in debt servicing costs, the fall in house prices, and low levels of consumer confidence. Employment levels are high, and income growth and household savings are supporting spending. The rebound in tourism is also supporting domestic demand.
“Aggregate demand continues to outstrip New Zealand’s capacity to supply goods and services, with a range of indicators continuing to signify broad-based inflation pressure,” RBNZ Governor Adrian Orr said.
RBNZ agreed that monetary conditions needed to continue to tighten further, so as to be confident there is sufficient restraint on spending to bring inflation back within its 1-3 percent per annum target range.
