RBNZ delivers eighth straight OCR increase

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RBNZ delivers eighth straight OCR increase

<p dir="ltr" id="docs-internal-guid-1efc6785-7fff-9eaa-ce04-6d03186625d3">The Reserve Bank (RBNZ) handed down yet another increase to the official cash rate at its monetary policy meeting today, the 5th of October, as it continues in the fight against the stubborn scourge of inflation with its eighth consecutive rate rise.</p><p dir="ltr">It's another 50 basis points increase this time up to 3.5%, which in New Zealand, is the highest level seen since 2015. It's also the most aggressive tightening of monetary policy that has ever been recorded, having increased by 325 basis points since it first increased from the pandemic emergency level of 0.25% in October 2021. </p><p dir="ltr">More rate hikes to come?</p><p dir="ltr">The RBNZ board in its statement spoke of the need to continue raising rates <a href="https://www.rbnz.govt.nz/hub/news/2022/10/continued-monetary-tightening" target="_blank">"at pace"</a> until the bank's target range for the CPI inflation was reached again at around 1 to 3%. </p><p dir="ltr">There was some consideration given to whether it was appropriate for a 75 basis points jump in October, but ultimately when weighing the fact that the population was yet to feel the full effect of previous increases, 50 basis points was later agreed upon as an acceptable amount at this stage.</p><p dir="ltr">Currently at around <a href="https://www.stats.govt.nz/news/annual-inflation-at-7-3-percent-32-year-high/" target="_blank">7.3%</a> after the June quarter, inflation is at its highest level in over three decades. The main contributors to the increase in New Zealand are similar to those experienced all over the world. Rising prices and demand for construction, housing, expensive petrol and diesel, supply chain issues, a tight labor market, and the impact of the conflict in e are still taking their toll.</p><p dir="ltr">The board was positive about the situation with the domestic economy though, commenting on the rebound of the national GDP in the June quarter. The country has relaxed its pandemic restrictions in recent months, and the resulting resumption of international tourism, a general increase in domestic activity, and resilient consumption, have been contributing to a more positive outlook.</p><p dir="ltr"><a href="https://www.nzherald.co.nz/business/adrian-orr-reserve-banks-tightening-cycle-is-very-mature/UYX7Q2DWHMGJC7JIB7NABPK77A/" target="_blank">Speaking at a seminar</a> launching the Council of Trade Unions' Alternative Economic Strategy last week, Adrian Orr, the Governor of the Reserve Bank of New Zealand, said that the country was on the right track to overcoming inflation and that it was getting closer. </p><p>"We've got a little bit more to do before we can drop to our normal happy place, which is to watch, worry, and wait for signs of inflation up or down." He said.</p><p dir="ltr">New Zealand began its monetary tightening policy well ahead of many other major nations when it increased rates back in October 2021. It's believed that inflation may have hit its peak now, as a recent drop-off in the price of oil and some constraints with supply chains have begun to ease.</p><p dir="ltr">The RBNZ warned that core measures of inflation have continued to increase though and as other central banks are tightening their monetary conditions, it impacts the growth prospects for the country's trading partners.</p><p dir="ltr">Financial markets and analysts are apparently already pricing in the official cash rate as reaching 4.5- 4.75% by the middle of 2023.</p><p>On the NZD</p><p>Having already fallen 19% in the past half year against the US dollar, the NZD was trading slightly up at around 0.57365 at the time of writing, according to <a href="https://www.activtrades.com/en/forex-trading" target="_blank">ActivTrades Forex trading data</a>. According to ActivTrades sentiment indicator on the <a href="https://www.activtrades.com/en/activtrader-platform" target="_blank">Active Trader platform</a>, traders are mostly buying the currency pair (77%).</p><p dir="ltr" id="docs-internal-guid-c1b6b8cc-7fff-794a-856c-57ff0a613492">Governor Orr spoke of the United States' front loading their interest rate rises as causing a huge drain in the capital around the world, as investors flocked to the US to buy higher-yielding assets. With the perception that the US dollar is a safe haven during economic uncertainty, this is also having an impact on the NZD's decline in recent months.</p><p dir="ltr">"In terms of a declining New Zealand dollar, almost every currency in the world is declining against the US dollar," he said. The EUR/USD even reached parity earlier this year, as we explained in a <a href="https://www.forexlive.com/Education/the-eur-usd-parity-what-does-it-mean-for-your-portfolio-20220722/" target="_blank">previous article</a>.</p><p dir="ltr">Finance Minister Grant Robertson spoke to the local <a href="https://www.rnz.co.nz/news/political/475546/global-financial-uncertainty-challenging-for-nz-economy-grant-robertson" target="_blank">Morning Report</a> saying that it is a "very volatile and uncertain situation," but that New Zealand was well placed to handle the volatile environment as a result of low unemployment, low public debt, and reasonable economic growth over the last few years of the pandemic.</p><p dir="ltr">Robertson commented that government spending has been reeled into the regular level of around 30% of GDP since the pandemic stimulus packages and other measures have all but ended. </p><p>"We're going to continue to work hard to make sure that we're supporting both households and businesses with strong economic policy," he said.</p><p dir="ltr">On the property market</p><p dir="ltr">The price of property across the country has had one of the largest quarterly drops ever recorded up to September, according to <a href="https://www.corelogic.co.nz/news-research/reports/house-price-index">CoreLogic</a>. The rate of decline may not be finished yet either. </p><p dir="ltr">According to the property research company, the average property price dipped by 4.1% last quarter after the extremely high prices of the pandemic with its cheap lending options has come to an end.</p><p dir="ltr">The RBNZ in May forecast that housing prices would fall by around 8.1% to the end of 2022, while some analysts see a drop somewhere in the double digits as being more feasible as many mortgage holders will roll into much higher rates in the coming three to six months.</p><p dir="ltr">It is hoped that a recovery of the market will start to commence around 2024 though, as inflation stabilizes back to target and interest rates return to normal levels. In the meantime, households are left to carefully manage their budgets and hope that wages stay somewhere in sight of the level of inflation.</p>

This article was written by Finance Magnates Staff at www.financemagnates.com.

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