The Reserve Bank of New Zealand (RBNZ) has decided to cautiously begin reigning in monetary policy. The increase of 25 basis points to the Official Cash Rate (OCR) this week is likely to be followed by further increases later this year and early next year.
In the Monetary Policy Review this week, the Monetary Policy Committee of RBNZ agreed to tighten monetary policy and to increase the OCR by 25 basis points to 0.50 percent.
RBNZ cited the need to keep inflation between one and three percent, while supporting maximum sustainable employment.
Before the latest outbreak of COVID-19 in the community, the stats from the June quarter showed that the economy had started to heat up. Unemployment stood at four percent, nearing levels last seen before the global financial crisis of 2008. This was at or above the maximum sustainable rate. Consumer prices, as measured by the CPI, surged by 3.3 percent in the year to June 2021, the biggest jump in a decade.
The decision to hold off on an increase in the OCR in August was solely a result of the level four restrictions placed on economic activity, which shrouded the future in uncertainty. Today, although the government seems to have abandoned its elimination strategy, the vaccine rollout has gathered pace. Even though we are still seeing new cases in the community, the recent rapid uptake of vaccinations affords some certainty and provides an opportunity for the economy to resume sustainable recovery. Moreover, fiscal support has been strong and we do not expect to see a dramatic rise in unemployment, largely thanks to the Government’s wage subsidy programme.
Global cost pressures continue to mount.
As the restrictions on economic activity are lifted, pent up consumer demand will be released. However, maritime shipping, which serves as the backbone of global trade, is experiencing extraordinary cost pressures. The severe shortage of containers has meant that transportation costs have skyrocketed and many suppliers can’t get the raw materials and products they need. And we all know what happens when supply cannot keep up with demand. Producer prices will continue to rise, eventually feeding into consumer prices, which will be reflected in the CPI.
Further OCR hikes are likely.
It is becoming clear that supply chain logjams will continue to plague suppliers and customers into the medium-term. Therefore, the price increases are here to stay, for now. With this in mind, RBNZ has indicated that it intends to slowly raise the OCR in increments of 25bps.
RBNZ is one of the first central banks in the western world to begin reigning in monetary stimulus.
As the pace of vaccination rollout and economic recovery has been different for each country, other central banks have been hesitant to tighten monetary policy before their economies are out of the woods. In its latest October review, the Reserve Bank of Australia (RBA) decided to keep its cash rate at the historically low level of 0.10 percent. The RBA also indicated that it does not expect to raise this rate until 2024. The chair of the Federal Reserve in the United States has maintained, until recently, that inflationary pressures were transitionary. The Federal Funds Rate (the US equivalent of the OCR), has been pinned to near zero since the beginning of the pandemic. However, the Fed has finally indicated that the rate will likely start increasing beginning in 2022. The Bank of England is in a similar position and has alluded to a rate hike as early as November 2021.