OCR hike first in three years

The Reserve Bank of New Zealand has increased the official cash rate (OCR) for the first time in more than three years, lifting it by 25 basis points to 2.5 per cent.

The decision was taken by the bank’s monetary policy committee on July 8 after the OCR had been held steady at 2.25 per cent since November last year.

It says New Zealand’s economic recovery was underway before the recent Middle East conflict, but lost momentum in the June quarter as the oil shock weighed on economic activity. 

“Growth is expected to resume in the September quarter as these effects fade and confidence improves,” it adds. 

“Over the medium term, inflation returning to the two per cent target mid-point will lift household purchasing power and help support a sustained recovery in growth and employment.

“The outlook for medium-term inflation pressures depends on the extent to which recent cost increases feed through into higher prices.

“Spare capacity in the economy is expected to limit firms’ ability to pass on higher costs, meaning many businesses may need to absorb them in margins. However, some firms may look to rebuild margins as demand recovers.”

The committee notes its monetary policy is calibrated to bring inflation back to target without causing unnecessary economic instability. 

“With inflation still above target and economic activity expected to strengthen, some further reduction in monetary stimulus is likely to be required to return inflation to the two per cent target mid-point,” it says. 

“Future OCR decisions will depend on how incoming data, price-setting behaviour and the strength of economic activity affect medium-term inflation pressures.”