The Reserve Bank of New Zealand’s monetary policy committee today raised its benchmark rate to 1.5%.
The Committee agreed that monetary conditions should continue to be tightened at the pace necessary to best maintain price stability and support a maximum of sustainable jobs.
The Committee remained comfortable with OCR’s outlook as outlined in their February report Monetary Policy Statement.
They agreed that moving the OCR to a more neutral stance sooner would reduce the risks of rising inflation expectations. A larger move now also offers greater political flexibility in light of the highly uncertain global economic environment.
The level of global economic activity continues to generate mounting inflationary pressures, exacerbated by ongoing supply disruptions, largely due to COVID-19. The Russian invasion of Ukraine has significantly aggravated these supply disruptions, leading to soaring prices for internationally traded commodities and energy.
However, the pace of global economic activity continues to slow. There is a high level of uncertainty created by the lingering impacts of COVID-19, and clear signals that broader monetary and financial conditions will tighten over the course of 2022. Added to this is the high level of geopolitical tension and related economic sanctions against Russia. .
In New Zealand, underlying strength remains in the economy, supported by healthy balance sheets, continued fiscal support and strong export earnings.
There have been economic disruptions due to the omicron outbreak. However, high vaccination rates in New Zealand are helping to reduce this disruption.
Increased global economic uncertainty and inflation are undermining consumer confidence. Rising mortgage interest rates – among other factors – have had the effect of reducing demand for mortgages and house prices.
However, pressures on economic capacity persist, with a wide range of indicators pointing to domestic capacity constraints and persistent inflationary pressures. Employment is above its maximum sustainable level and labor shortages are affecting many businesses.
The Reserve Bank’s measures of underlying inflation are at or above 3%. Inflationary pressures are further heightened by currently high imported energy and commodity prices, which are driving up headline CPI inflation.
The Committee will continue to ensure that the current high consumer price inflation does not become embedded in longer-term inflation expectations.