MNI STATE OF PLAY: RBNZ "Resolute" On Inflation, Despite Risks

New Zealand’s central bank is "resolute" on raising interest rates to a level where it is confident that consumer price inflation will settle within its target range of 1% to 3%, while acknowledging that higher rates are likely to impact on economic activity in the medium term.

The Reserve Bank of New Zealand today raised its Official Cash Rate by 50 basis points to 2.5%, the sixth hike since the tightening cycle began in October last year when rates were at the record low 0.25%, (See: MNI BRIEF: RBNZ To Lift Rates Until Inflation Inside Target).

STATEMENT LANGUAGE

In its statement on Wednesday, the RBNZ said it would continue to lift the OCR to combat inflation, with the CPI currently at 6.9%, although it said core inflation measures were at around 4%.

The bank’s last Monetary Policy Statement (MPS), released in May, forecast that the OCR would be at 3.4% by the end of this year and today the bank suggested it would maintain this track, saying it was “comfortable” that the forecast “remained broadly consistent with achieving its primary inflation and employment objectives – without causing unnecessary instability in output, interest rates and the exchange rate.”

“Once aggregate supply and demand are more in balance, the OCR can then return to a lower, more neutral level,” the RBNZ said.

MORE IN AUGUST

The July decision prepares the way for more rate hikes to come, with the RBNZ’s statement suggesting the OCR will rise by around another 100 basis points with three more meetings of the Monetary Policy Committee scheduled this year.

The next MPS will be released in August, and by that time New Zealand could potentially be in a recession after first quarter growth shrank by 0.2%, but the RBNZ has signaled that prospect is unlikely to stop more rate hikes to come.