What the Reserve Bank's latest interest rate increase means for you and the economy. Video / NZ Herald
OPINION:
Hiking interest rates after a disaster like the one in the country was a tough call - but it was the right one.
With the short-term impact of Cyclone Gabrielle likely to add to the country’s inflation woes the Reserve Bank had no choice but to stick to itsguns - lifting the OCR by 50 basis points to 4.75 per cent.
“All else being equal, these severe storms will keep CPI inflation high for longer and may lead to a longer period with inflation above 7 per cent,” Reserve Bank Governor Adrian Orr said. “While estimates are highly uncertain, our central projection assumes the storms result in an additional 0.3 percentage points on CPI inflation in each of the March and June 2023 quarters.”
While the RBNZ did - as widely expected - pull back from a previously forecast 75-basis-point hike, much of the logic for that was pinned on the signs easing in global inflation.
Some economists - like those at Kiwibank - had argued the hikes should go on hold until April while the damage from Gabrielle was assessed.
But the RBNZ didn’t pull any punches in its justification for the 50 basis point rise.
“The best contribution monetary policy can make is to free up resources by slowing demand elsewhere in the economy with higher interest rates. This will also limit further increases in the cost of living over the medium term,” Orr said.
While the total impact of the recent weather events is clearly a major economic cost, history suggests that in the short term recovery and rebuilding activity provides additional stimulus to an economy - the last thing we need right now.
After the Christchurch earthquakes, the Reserve Bank reversed plans for rate hikes and cut the OCR by 50 basis points.
But as Governor Adrian Orr emphasised today, the economic context was very different then - with sectors like construction still in the doldrums after the Global Financial Crisis.
More broadly the RBNZ has argued it is still too early to assess the monetary policy implications of the cyclone.
The RBNZ did recognise the “devastating effect” the weather events have had on the lives of many New Zealanders.
“The timing, size, and the nature of funding the Government’s fiscal response are also yet to be determined,” Orr said.
As well as causing price rises for some goods and higher inflation export revenues would be negatively impacted.
But the monetary policy was set with a medium-term focus, and the RBNZ would look through these short-term output variations and direct price effects, Orr said.
For now, at least, this event was primarily an issue for the private sector and government fiscal policy, he said.
On that basis, the RBNZ stuck to its guns, leaving the projected peak for the OCR at 5.5 per cent.
But some economists interpreted the tone of this statement as less hawkish than in November, which may mitigate the worst of the mortgage rate pain.
“We suspect it will now only lift the overnight cash rate to 5.25 per cent instead of our previous forecast of 5.5 per cent,” said Marcel Thieliant, Head of Asia-Pacific at Capital Economics.
The good news for stretched borrowers was that there were no surprises for the financial markets so mortgage rate rises should be limited, with pricing already baked in by banks.
“The impact of today’s decision on mortgage rates doesn’t seem likely to be too significant,” said CoreLogic NZ Chief Property Economist, Kelvin Davidson.
“Floating rates will likely go up again, but only about 10 per cent of loans are on these rates,” he said.
“There may also be a bit of upwards pressure on one-year fixed rates, but it’s expected to be minimal given further OCR increases had already been ‘priced in’, and that the banks have actually brought down their longer-term fixes in recent weeks.”
Flooding in Wairoa caused by Cyclone Gabrielle. Residents displaced by the cyclone damage will add to the pressure in the region's rental market. Photo / Wairoa District Council
The RBNZ still forecasts a recession in the second half of this year but now sees the economy recovering faster - moving back to growth from the start of 2024.
ANZ chief economist Sharon Zollner said the RBNZ had taken the “only sensible approach” to the impacts of Cyclone Gabrielle.
The 50-basis-point hike was effectively a “wait and see” approach, she said.
“That’s because expectations of the future OCR are actually more important for monetary conditions than the actual decision on the day,” she said.
“Had the RBNZ blinked today, it would have risked losing control of the narrative on the future path for the OCR, potentially seeing the swaps curve and mortgage rates drop sharply.”
As it was the kiwi dollar rose by one-third of a US cent after the announcement but settled back to US62.3c - well within the trading range of recent days.
