Reserve Bank stays the course with 0.50% OCR hike

Housing Market Written by John Bolton, Feb 22 2023

No surprises there, then.

The Reserve Bank (RBNZ) has played things pretty much as expected with today’s Official Cash Rate (OCR) announcement, pushing through a 0.50% hike to take us from 4.25% to 4.75%.

I think there’d been a lot of Kiwi hoping Governor Orr might go easier on us this time round, maybe even pause hikes completely, to provide some relief to the economy (and those most severely impacted) in the wake of the recent North Island floods and Cyclone Gabrielle.

And while I can understand the sentiment, the fact is that supporting New Zealand’s recovery really isn’t part of the RBNZ’s remit. It’s the Government’s job and should be handled using far more appropriate mechanisms like fiscal policy.

So, I would never have expected the Reserve Bank to have made decisions based on this alone – especially when you consider that the short-term impact of the floods will be inflationary (driving a spike in food prices).

I’ve said before that an increase today was inevitable. And even though 0.50% isn’t the result many were hoping for, it does mark a step back from the hyper-aggressive stance we saw from the RBNZ back in November, when it pushed through that record 0.75% hike.

This shift suggests that while the Reserve Bank feels there’s still work to be done to fully slay the inflationary dragon, it’s seeing strong signs that things are starting to come under control.

By opting for 0.50%, the RBNZ has done the best it can to strike the balance between going too hot (0.75%) – sending us hurtling for a hard landing – or too cold (0.25%) and potentially undoing the progress that’s been made in the battle against inflation to date. It’s that Goldilocks Zone I’ve talked about before. 

In terms of mortgage rates, whilst floating rates will increase, a 0.50% OCR increase was already priced into the fixed rates out there in market, so the good news is I wouldn’t expect them to climb any further from here. 

Are we still heading for a peak OCR of 5.50%?

Today was also an opportunity for the Reserve Bank to review and revise its forecasted peak OCR, if it felt that was the right thing to do.

But instead, Governor Orr has opted to stay the course he outlined for us back in November 2022, heading for a peak OCR of 5.50%.

I’ve been strongly of the view that we won’t need the OCR to get that high, simply because I think previous hikes will take the heat out of the economy much faster than expected.

And I’m still of that view.

For now, though, I think the RBNZ is just biding its time while it waits to understand the full impact of previous hikes. It’s not yet 100% certain we’ve slayed the inflationary beast, and it doesn’t want to jump the gun by calling things too soon.

The next chance for the Reserve Bank to review its forecast for peak OCR is two announcements away, on 24th May – and I suspect that by then, it could be a very different story.

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