January 28, 2023


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Reserve Bank raises official cash rate by 50 basis points to 2.5 percent

[Source: RNZ]

The Reserve Bank has raised the official cash rate to a six-year high and promised more rises until it gets inflation under control.

The benchmark rate was raised, as expected, by 50 basis points – half a percentage point – to 2.5 percent.

In a brief statement the Monetary Policy Committee said the economy was still performing strongly, the labour market remained tight, and households were in good financial shape.

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However, it reaffirmed its hawkish approach to tackling inflation, currently at a 30-year high of 6.9 percent.

“The committee is resolute in its commitment to ensure consumer price inflation returns to within the 1 to 3 percent target range.”

It said inflation was being stoked around the world by a wide range of factors, including Covid-19-related supply chain disruptions and the Ukraine war.

“Food and energy prices are especially affected by geopolitical tension.”

The committee said the tight labour market and low unemployment rate were supporting domestic spending, household finances were “resilient”, strong exports were supporting the economy as was broad government spending.

“Labour and resource scarcity are also contributing to upward price pressures which are currently exacerbated by seasonal illness, a resurgence in Covid-19 cases, and a net outflow of labour abroad.”

It said it was possible that inflation would push higher but accepted that growth could also be hit in the medium term.

“The committee agreed to continue to lift the OCR to a level where it is confident consumer price inflation will settle within the target range.”

It said it would stick with the cash rate rises outlined in the May monetary statement, which projected the cash rate at 3.5 percent by the end of the year and pushing to at least 4 percent by the middle of 2023.

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

Many economists believe the RBNZ will pause at the end of the year to assess the impact of the rate rises and reduce the risk that it pushes the economy in to recession.