Mahvash Ikram
Reserve Bank Governor Anna Breman has rejected suggestions that hiking the official cash rate (OCR) will choke economic growth.
Reserve Bank Governor Anna Breman
Defending Wednesday’s 0.25-point OCR rise to 2.75%, Breman said lower inflation would lift real incomes and household purchasing power, which would support demand and growth.
She also signalled further increases might be on the horizon.
“The OCR…. we believe, is still at an accommodative level, so we’re moving it up towards neutral. You can also see that, from an historical perspective, the OCR is still relatively low, also compared to where it is in many other countries.”
Annual inflation hit 4.1% in the June quarter, well above the Reserve Bank’s 1% to 3% target, driven largely by higher fuel and related prices as a result of the Middle East conflict. Excluding vehicle fuels, annual CPI inflation fell to 2.9%.
The expectations
The Reserve Bank’s Monetary Policy Committee expects inflation to return to the target band by mid-2027 and reach the 2% midpoint by late next year.
Bringing inflation back to target would itself support the economic recovery, Breman said. “It’s also important to stress that bringing inflation back will support real incomes, household purchasing power, and that will be good for demand and growth as well. So, we do think that we can do that.”
Four of the six committee members, including Breman, warned inflation could run higher than the bank’s own forecast.
“The recovery is expected to strengthen and broaden. The committee expects New Zealand’s export sector to remain resilient and household spending to gradually increase,” the committee said.
“This decision reduces the risk that the OCR needs to increase by more later.”
‘Gradually removing’
The committee framed the increase as the gradual removal of monetary stimulus rather than a move into restrictive territory.
Committee member Karen Silk drew the distinction sharply, saying current financial conditions could not be described as tight.
” We described them as having tightened,” Silk said. “And we still think there’s a reasonable level of accommodation sitting there today. And that’s why we refer to it as a withdrawal of stimulus, not moving into a restrictive position.”
All six committee members agreed on the need for the OCR to rise, but their views on the likely trajectory of inflation were not unanimous. Hayley Gourley, Silk, Prasanna Gai and Breman saw inflation risks tilted above the bank’s central forecast, while Paul Conway and Carl Hansen said the risks were balanced, pointing to the slow housing market and consumers’ reluctance to spend.
The committee agreed that higher inflation posed significant risks to economic activity, and that growth might not translate into new jobs if businesses focused on technology and efficiency rather than hiring new staff.
Unemployment rose to 5.6% in the June quarter, the highest since 2015, while the underutilisation rate lifted 0.9 percentage points to 13.8%. The Reserve Bank’s own records note employment growth has not been sufficient to absorb new entrants to the market, with unemployment is significantly higher in Auckland and Wellington, and among youth and the long-term unemployed.
Deposit rates
The committee noted that higher wholesale rates had flowed through to mortgage and business lending, but that banks had passed less of it on to savers, making new lending cheaper to fund. Lifting savings rates would be more in line with what the Reserve Bank was trying to achieve, the committee said.
Borrowers should expect little immediate change, Breman said, because banks had already priced in the increase to the OCR.
“Wholesale interest rates have increased in anticipation of the rate hike today,” she said. “So in terms of the most common tenures, like one to three years, we don’t expect much of an effect because there’s already been hikes from the banks.”
Where next?
The Reserve Bank is not committing to a timetable when it comes to future rate rises.
“We do think that it’s likely there may be a future OCR increase, but the timing is highly uncertain,” Breman said, stressing the committee was “not on a preset course”.
ASB expects the OCR to end the year at 3.25%. BNZ head of research Stephen Toplis forecasts rises at both the 28 October and 9 December meetings and a cash rate of 4% by mid-2027.
The October decision lands about 10 days out from the 7 November general election. However, Breman said the timing would not affect the committee’s decision.
“We set monetary policy according to our mandate, and that is to bring inflation back to 2% over the medium term while still avoiding unnecessary volatility in economic activity… So we focus on the mandate and the election does not come into that decision.”
The next OCR decision is a Monetary Policy Review on 28 October, followed by a Monetary Policy Statement on 9 December.
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