Reserve Bank Governor puts a ‘hawkish hold’ on interest rates

Neil Sands

The Reserve Bank shied away from an interest rate hike this month but stands ready to take “timely and decisive” action to prevent the Middle East conflict fuelling long-term inflation, Governor Anna Breman said on Wednesday.

Announcing the central bank had kept the Official Cash Rate (OCR) at 2.25%, as widely expected on financial markets, Breman talked up the prospects of tighter monetary policy if the conflict continues to restrict oil supplies, with knock-on impacts across the entire global economy.

Breman warned that “decisive and timely increases in the OCR would be required” if medium-to-long-term inflation expectations rose above 2.0%, the mid-point of the bank’s 1.0% to 3.0% target band.

She said there was no doubt the war was already pushing up short-term inflation, which is forecast to reach 4.2% in the June quarter, and stifling economic recovery.

A key focus will be deciding when to act, which involves discerning these short-term movements from the “second-round impacts” which indicate longer-term challenges.

“The [monetary policy] committee’s decision to hold the OCR balances the potential benefits of responding pre-emptively to the risk of higher medium-term inflation against the cost of unnecessarily stifling the economic recovery,” Breman said.

Analysts described Wednesday’s decision as a “hawkish hold”.

“The [committee members] find themselves in an unenviable position and uncomfortable trade-offs lie ahead,” ASB senior economist Mark Smith said.

“One course of action is to wait until more clarity emerges… The other is to heed the risks of inflation becoming unanchored and to reduce monetary policy accommodation in a timely manner.”

Westpac chief economist Kelly Eckhold tipped an OCR rise in September, a full quarter earlier than his previous estimate of December.

“An earlier start than September should not be ruled out… The key question is: will sufficient evidence of second-round inflation impacts have accumulated by then? We think that’s still an open question at this point,” he said.

ANZ chief economist Sharon Zollner also expected rates to rise before December.

“Fair to say it is going to be a highly subjective exercise deciding when the RBNZ should and will start to lift the OCR but in our view, the balance of risks is shifting towards the committee deciding that the hurdle has been cleared earlier than December,” she said.

The next monetary policy decision is due on May 27.