"Stitch In Time" Logic Underpins Another 50bp OCR Hike, Steeper OCR Track

The RBNZ delivered a back-to-back 50bp hike to the OCR while signalling the need to take more heat out of the economy to ensure that consumer price inflation is brought under control.

• The statement underscored the Committee's ever stronger focus on fighting runaway inflation, which remains above the target range across measures of headline and core prices, with near-term inflation expectations also high. Members observed that medium-term inflation expectations are near the mid-point of the target range ("albeit heightened somewhat") and it is crucial to keep them that way.
• Concerns about inflation were reflected in the updated forecasts, which now suggest annual price growth will peak at +7.0% in the June quarter. This was foreshadowed in April Monetary Policy Review as inflation projections from February MPS proved outdated.
• The Committee judged that the observed strength in inflation and employment "is broad-based, arising from a range of economic factors," as the rate of price growth "reflects a relatively similar contribution of global imported price pressures and domestic price pressures."
• Policymakers reaffirmed their "stitch in time" tactics and strengthened the language around it. The minutes noted that "raising the OCR by more and sooner was consistent with avoiding higher future costs to employment and the economy in general as a result of high inflation.
• Members discussed the risks of doing "too much too soon," but concluded that household balance sheets remain healthy and therefore a decisively hawkish posture should not have major negative consequences from financial stability perspective.
• The adjustment in tactics included a promise of stepping back once the tasks of constraining consumer price inflation and inflation expectations are completed. The OCR track was altered to reflect a steeper tightening path with a higher peak (3.95%), but easing off towards the end of the forecast horizon.
• Accordingly, the Committee said that eventually, "once aggregate supply and demand are more in balance, the OCR can return to a lower, more neutral level." However, projected rate reductions remain rather far off and are only pencilled in for mid-2024, the rough timeline in which the RBNZ is planning to achieve its main goals.