Business reporter Jamie Grey explains the Reserve Bank's decision to lift the Official Cash Rate to 2.5 per cent.
Video / Cameron Pitney
The Reserve Bank has tightened the monetary screws again with a 50 basis point lift in its official cash rate, but the move may not automatically flow through to mortgage rates.
The increase - the third 50 basis point hike in a row - was largely expected.
There was littlein the central bank's one-page release to suggest that it would leave its official cash rate (OCR) at 2.5 per cent.
But there also relief the latest rise was not 75 basis points, which was seen as an outside possibility.
"The (Monetary Policy) Committee agreed it remains appropriate to continue to tighten monetary conditions at pace to maintain price stability and support maximum sustainable employment," the bank said.
The committee reiterated its commitment to try and squash the consumers price index back to within the 1 to 3 per cent target range.
But with inflation running at 6.9 per cent in the March year - its highest point in more than 20 years - the central bank has a job on its hands.
Economists said the bank's message was largely a cut and paste of its more detailed monetary policy statement issued in May, which explained the limited market reaction in the wholesale interest and foreign exchange markets following its release.
The bank's latest move does not automatically translate into still higher fixed rate mortgage interest rates, which currently sit at around 5 or 6 per cent for two-year fixed.
ANZ strategist David Croy said the market had not reacted to the release "because it has confirmed what everybody was thinking".
Croy said the bank's "continue at pace" comment meant more hikes were in store.
"To the markets, that means that there is at least another 50 basis point rate hike coming, but again that's broadly been priced in," he said.
On its impact on mortgage rates, Croy said: "Given that the decision was as expected, we are not likely to see significant moves in term interest rates, so you are not going to see large increases in the one or two-year swap rate," he said.
"And those are the markets that typically determine where fixed rate mortgages go."
Should borrowers automatically assume that fixed rate mortgages should rise from here?
"Most definitely not in the term or fixed rate space - they should not necessarily jump to that conclusion."
The Reserve Bank, in its statement, offered a glimmer of hope for borrowers.
"Once aggregate supply and demand are more in balance, the OCR can then return to a lower, more neutral, level."
Reserve Bank of New Zealand Governor Adrian Orr. Photo / Mark Mitchell
Hamish Pepper, fixed income and currency strategist at Harbour Asset Management, said the comment was an acknowledgement that conditions are tight, but that they will not stay tight forever.
He expected very short term mortgage rates to rise but that the market would not experience the "huge increments" seen over the last year.
The Reserve Bank said the level of global economic activity, combined with the ongoing supply disruptions largely driven by both Covid-19 persistence and the Russian invasion of Ukraine, continue to generate global inflation pressures.
Food and energy prices are especially affected by geopolitical tension.
"However, the pace of global economic growth is slowing," it said.
"The broad-based tightening in global monetary and financial conditions is acting to reduce spending growth.
"Asset prices have also declined due to higher interest rates and a weaker earnings outlook," it said.
ASB Bank economists expect annual CPI inflation to peak in the second quarter just north of 7 per cent and said it was still far from clear when it will settle back into the Reserve Bank's 1-3 per cent target band.
"Our research shows there is some risk that inflation is set to become more persistent in the New Zealand economy if the labour market remains tight," they said.
"The most important thing for the RBNZ will be waiting for clear and consistent evidence that inflationary pressures are coming back to earth before calling an end to the tightening cycle.
"For now, we expect the Reserve Bank to dial down the pace of hiking to 25bps a meeting in October as inflationary pressures begin to subside and slowing growth eases pressure on the labour market, before calling a day on the hiking cycle completely at the end of the year at a 3.5 per cent peak."
ASB's "best guess" was that the OCR would drop back to more neutral levels by early 2024.
