MPC Raises OCR By 25bp, Forecasts More Aggressive Policy Tightening

The RBNZ raised the OCR by 25bp as the Monetary Policy Committee "agreed it remains appropriate to continue reducing monetary stimulus as to maintain price stability and support maximum sustainable employment." The outcome of the meeting was in line with consensus forecast, although the broader view was that there was a non-negligible chance of a more aggressive 50bp hike ahead of a rather lengthy hiatus before the next policy meeting.

• The Reserve Bank are clearly more concerned about mounting inflationary pressure. They noted that "headline CPI inflation is expected to measure above 5 percent in the near term before returning towards the 2 percent midpoint over the next two years." Their assessment contrasts with the October statement, which suggested that inflation will spike above 4 percent in the near term before returning towards the midpoint over the medium term, without a specific timeframe.
• There have been some tweaks to surrounding language as well. Policymakers removed mentions of core inflation and inflation expectations being close to the midpoint of their target range from the statement and added a passage about the impact of "current domestic capacity constraints."
• The Committee noted that "near-term risks to inflation are skewed to the upside, and discussed the risk that higher near-term inflation could become embedded in price setting behaviour" but added that "medium-term measures provide a better gauge of whether inflation expectations remain anchored, and these remain close to the target midpoint"
• Unlike in the October Monetary Policy Review, the Committee explicitly acknowledged that "employment is now above its maximum sustainable level" amid the continued tightening of capacity pressures. In the minutes from their meeting, the Committee tipped hat to measures of labour market slack reaching lowest levels in a decade, but also observed that wage growth still lags the rate of CPI inflation.
• In the closing paragraph of the statement, the Committee noted that "further removal of monetary policy stimulus is expected over time." This guidance was provided "given the medium-term outlook for inflation and employment," while in October future moves were seen as "contingent on the medium-term outlook."
• The Monetary Policy Statement revealed an expected lift to the OCR track, the RBNZ's projection of where they see the key policy rate over time. Given their assessment of medium-term inflation and employment outlook, the projection of a more aggressive tightening path was unsurprising. The Committee now expect the OCR to reach the neutral level of 2% by the end of 2022 before rising further.
• There was little to rock the boat in the Reserve Bank's commentary on property prices. The Committee outlined a suite of factors which "should all act to moderate house prices over the medium term" and noted that "continued increases in the OCR are expected to support more sustainable house prices."