Cash rate climbs to 1.5%

The Reserve Bank has increased the official cash rate (OCR) by half a percentage point to 1.5 per cent as it seeks to reduce the risk of rising inflation expectations.

Its monetary policy committee agreed on April 13 to moving the OCR to a “more neutral stance sooner” after economists had debated whether the bank would lift the rate by 25 or 50 basis points.

The Reserve Bank says making a larger increase now will give it more flexibility in the months ahead “in light of the highly uncertain global economic environment”.

“The level of global economic activity continues to generate rising inflation pressures, exacerbated by ongoing supply disruptions in large part driven by Covid-19,” it explains. 

“The Russian invasion of Ukraine has significantly added to these supply disruptions, causing prices to spike in internationally traded commodities and energy.”

A statement from the committee notes the pace of global economic activity continues to slow, but there is underlying strength in the New Zealand economy, which was supported by sound balance sheets, continued fiscal support and strong export earnings. 

“Heightened global economic uncertainty and inflation are dampening consumer confidence,” it adds. 

“The rise in mortgage interest rates – amongst other factors – have acted to reduce mortgage demand and house prices. However, economic capacity pressures remain, with a broad range of indicators highlighting domestic capacity constraints and ongoing inflation pressures. 

“Employment is above its maximum sustainable level and labour shortages are impacting many businesses.”

The Reserve Bank’s core inflation measures are at or above 3 per cent and high imported energy and commodity prices are lifting headline consumer price index inflation.

“The committee will remain focused on ensuring that current high consumer price inflation does not become embedded into longer-term inflation expectations,” it says.