No worries about a slowing economy – indeed nor the 0.7% contraction in the final quarter of 2022 – for the Reserve Bank of NZ which boosted its official cash rate (OCR) by another half a per cent to 5.25% on Wednesday.
The sharp rise was double the forecast quarter of a point rise from the RBNZ which has the distinction of being the first major central bank to push its economy into contraction for a quarter.
The RBNZ did try of soften the blow by hinting very strongly that this would be the last rise for a while
“The Committee agreed that the OCR needs to be at a level that will reduce inflation and inflation expectations to within the target range over the medium term,” The post meeting statement read.
“The Committee agreed that maintaining the current level of lending rates for households and businesses is necessary to achieve this, along with a rise in deposit rates. New Zealand’s financial system is well positioned to manage through a period of slower economic activity.”
The rise followed a similar sized increase in February and came a day after the Reserve Bank of Australia left the cash rate unchanged at 3.6% at its meeting on Tuesday.
The RBA Governor, Philip Lowe said the decision not to lift the cash rate was to allow time for the lagging impact of the monetary policy tightenings to catch up. No such worries across the Tasman for the leads and lags of the RBNZ’s rapid fire and outsized rate rises.
For Australian businesses operating across the Tasman – especially the big four banks and major retailers – the latest increase in the OCR will be a blow to sales and earnings for the rest of 2023.
Retailers like JB HI FI which has ambitious plans to expand and upgrade its NZ chain, the rate rises could force them to delay the spend, especially as sales and earnings in Australia are slowing as the rate rises here from the RBA hit home and consumer spending slows (as shown by flat to weak growth in retail sales).
In its post decision statement, the RBNZ justified the increase:
“The Committee agreed the OCR needs to increase, as previously indicated, to return inflation to the 1-3 percent target range over the medium term. Inflation is still too high and persistent, and employment is beyond its maximum sustainable level.
The level of economic activity over the December quarter was lower than anticipated in our February Monetary Policy Statement and there are emerging signs of capacity pressures in the economy easing. However, demand continues to significantly outpace the economy’s supply capacity, thereby maintaining pressure on annual inflation.
“The recent severe weather events in the North Island have led to higher prices for some goods and services. This higher near-term CPI inflation increases the risk that inflation expectations persist above our target range.”
“New Zealand’s economic growth is expected to slow through 2023, given the slowing global economy, reduced residential building activity, and the ongoing effects of the monetary policy tightening to date. This slowdown in spending growth is necessary to return inflation to target over the medium-term,” the RBNZ said.
Squeezing the pips would seem an appropriate way to describe this 0.50% rise.
And in Australia, a very different approach from the Reserve Bank Governor, Phillip Lowe made it clear Australia was better placed compared to most other countries.
He said “Australia is better placed than many other countries.”
“Our banking system is strong, we have our lowest unemployment rate in decades, the prices of many of our exports are very high and many households saved a lot of extra money during the pandemic.
“At the same time, many households are feeling a painful squeeze on their budgets. Inflation is too high, although it is coming down due to both the resolution of some supply-side problems and the RBA’s earlier tightening of monetary policy.
This month, the Board decided to hold the cash rate steady after increasing interest rates at the previous 10 meetings.
“This will provide more time to assess how the various influences on the economy balance out. At our next meeting, we will again review the setting of monetary policy with the benefit of an updated set of forecasts and scenarios.”
So, no time to pause and assess in NZ versus Australia’s more cautious approach – which will prove the better economic judgement in the long haul?
