Highlights
- New Zealand Increases OCR to Tackle Inflation Pressures
- Severe Weather Events Drive Inflation in New Zealand
- New Zealand Faces Economic Slowdown Amid High Inflation
Overview
The Monetary Policy Committee of New Zealand has increased the Official Cash Rate (OCR) by 50 basis points, taking it from 4.75% to 5.25%. This move comes as the Committee seeks to return inflation to the target range of 1-3% over the medium term.
Inflation Pressures
Inflation is currently high and persistent, while employment is beyond its maximum sustainable level. Despite emerging signs of capacity pressures in the economy easing, demand continues to outpace the economy’s supply capacity, which is keeping the pressure on annual inflation. Severe weather events in the North Island have led to higher prices for some goods and services, increasing the risk that inflation expectations will persist above the target range.
Economic Outlook
Over the medium term, the Committee anticipates that economic activity will be supported by rebuilding efforts following the weather events, but the demand for resources is expected to add to inflation pressure. Meanwhile, global growth is expected to be below average, contributing to lower demand for New Zealand’s commodity exports. Although growth in New Zealand’s service exports, particularly tourism, is expected to provide some offset, the country’s economic growth is projected to slow through 2023.
Monetary Policy
The Committee believes that a slowdown in spending growth is necessary to return inflation to the target range over the medium term, and that the OCR needs to be at a level that will reduce inflation and inflation expectations accordingly. The current level of lending rates for households and businesses is to be maintained, while deposit rates will rise.
Financial Stability
The Committee is confident that New Zealand’s financial system is well-positioned to manage through a period of slower economic activity. Despite the recent global banking stress and weaker outlook for global demand, New Zealand’s financial system is well placed to manage through a period of slower economic activity. The Committee believes that there is no material conflict between lowering inflation and maintaining financial stability in New Zealand. Credit conditions have not tightened significantly, and arrears on mortgages and other debts remain at low levels.
Conclusion
The Monetary Policy Committee of New Zealand has increased the OCR to combat inflation pressures and fulfill its Remit. The Committee is expecting to see a continued slowing in domestic demand and a moderation in core inflation and inflation expectations, which will determine the direction of future monetary policy.