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Reserve Bank lifts OCR to 0.5%

Rate may climb to 1.5 per cent in the coming months as market anticipates further increases.
Posted on 07 October, 2021
Reserve Bank lifts OCR to 0.5%

The Reserve Bank has raised the official cash rate (OCR) by 25 basis points to 0.5 per cent, the first increase in seven years. 

The move was widely expected and ends an 18-month spell at the record-low rate of 0.25 per cent.

It is predicted the rise will be the first of a series of increases over the coming months, with the OCR anticipated to hit at least 1.5 per cent.

The Reserve Bank’s Monetary Policy Committee says in a statement its decision comes as the level of global economic activity has continued to recover, supported by accommodative monetary and fiscal settings.

It notes rising vaccination rates have also allowed a relaxation of mobility restrictions.

“While economic uncertainty remains elevated due to the prevalent impact of Covid, cost pressures are becoming more persistent and some central banks have started the process of reducing monetary policy stimulus,” the statement says.

“New Zealand’s public health settings are also evolving as domestic vaccination rates rise. The higher the vaccination rate, the less virus-related disruption there will be to New Zealand’s economic activity over coming years.

“The current Covid-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August statement. 

“Capacity pressures remain evident in the economy, particularly in the labour market. A broad range of economic indicators highlight that the New Zealand economy has been performing strongly in aggregate.”

The committee says the economy contracted sharply during the nationwide Covid-19 lockdown in August, but “household and business balance sheet strength, ongoing fiscal policy support, and a strong terms of trade provide confidence that economic activity will recover quickly as alert level restrictions ease”.

It adds that further removal of monetary policy stimulus is expected over time, with those decisions being based on the medium-term outlook for inflation and employment.

The last time the Reserve Bank raised the OCR was July 2014, from 3.25 per cent to 3.50 per cent. The last change in any direction was in March 2020, when it was lowered from one per cent to 0.25 per cent.