Cash rate hits seven-year high

The Reserve Bank of New Zealand has lifted the official cash rate (OCR) to its highest level since 2015 and suggests there will be more increases until it gets inflation under control.

The benchmark rate was raised by 50 basis points, or half a percentage point, to three per cent on August 17. The Reserve Bank says it now sees the OCR peaking at 4.1 per cent, up from a previous forecast of 3.95 per cent.

Monetary policy committee members say the economy is still performing strongly, the labour market remains tight, and households are in good financial shape.

“It remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and contribute to maximum sustainable employment,” the committee says in a statement.

“Core consumer price inflation remains too high and labour resources remain scarce.”

The Reserve Bank has a target for inflation to sit at one to three per cent but it is currently at 7.3 per cent.

The committee notes domestic spending remains resilient to global and local headwinds to date and there is sound household finances, strong exports, and broad government spending.

However, production is being constrained by acute labour shortages, heightened by seasonal and Covid-19-related illnesses. 

The committee’s forecasts signal further OCR rises are likely in October and November, with little prospect of cuts before late 2024.