In its first official cash rate hike in over three years, the Reserve Bank hopes to relieve inflation pressures driven by the Middle East war’s disruption to oil supplies, writes Henry Oliver in today’s excerpt from The Bulletin.
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The Reserve Bank raised the official cash rate (OCR) by 25 basis points to 2.5% yesterday – the first increase in over three years – citing inflation pressures driven by the Middle East war’s disruption to oil supplies through the Strait of Hormuz. The Monetary Policy Committee (MPC) said inflation remained above its 1–3% target band, with annual inflation at 3.1% in the March quarter, and forecast it would peak at 4.3% in the September 2026 quarter before returning to the 2% midpoint by mid-2027.
The decision was unanimous. Finance minister Nicola Willis characterised the move as the Reserve Bank “essentially easing their foot a little bit off the accelerator that has been in place in the New Zealand economy in recent months,” The Post’s Henry Cooke reported this morning.
Will it hurt mortgage holders?
Yes. OK, maybe – but probably less than feared. “For those concerned that today’s rate increase will push up their borrowing rates, relax,” BNZ head of research Stephen Toplis told the Herald’s Jenée Tibshraeny. Two-year fixed rates had barely shifted following the announcement, Toplis said, because the move was already largely priced into financial markets. “Given this, suggestions that a hike today would clobber growth are misplaced.”
ANZ chief economist Sharon Zollner agreed, saying the hike would “put a bit of a floor under short-end rates” rather than materially push lending rates higher, noting the Reserve Bank would have shocked markets by not hiking, and risked looking like “the boy who cried wolf” on inflation. Zollner also pointed out that OCR changes take around 18 months to filter through: six months after the Reserve Bank’s final cut in this cycle, the average interest rate paid on the country’s mortgages was still falling, sitting at 4.83%.
Kiwibank chief economist Jarrod Kerr, who had called for the Reserve Bank to hold, was the dissenting voice among bank economists, saying the decline in oil prices since the May meeting should have signalled a temporary inflation spike, and pointing to weak labour and housing markets and an uneven recovery. “The so-called ‘wealth effect’ has been missing for years now,” he told the Herald.
More hikes to come – with potentially tricky political timing
The MPC was explicit that further increases were “likely to be required”. Zollner said ANZ’s forecast of three hikes in quick succession was unchanged, though the underlying story was now “a much more cheerful one” – the Reserve Bank hiking because the economy no longer needed stimulatory monetary policy, rather than because of an external cost shock demanding short-term pain.
But, as Cooke argued in The Post, yesterday’s hike is not the one Willis needs to worry about – it’s the next one. There are three more scheduled OCR meetings this year, two of them before the election. A hike at the 28 October review would fall two days into the early voting period and could be influential in what voters think of the current government’s running of the economy. Cooke notes research from UK elections suggesting conservative governments are particularly vulnerable to rate hikes, with every one percentage point increase in the 10 months before an election associated with a 0.75 point fall in the conservative vote.
A “Halloween hike” in October – potentially the third in a row – would put Willis in an uncomfortable position: she spent much of 2022 attacking then-finance minister Grant Robertson for rate rises he blamed on overseas events. “Christopher Luxon and Nicola Willis were quick to take credit when mortgage rates came down,” Labour’s finance spokesperson Barbara Edmonds said yesterday in a statement reported by RNZ. “They need to take responsibility now they’re set to go back up.”
