The Committee agreed that the OCR needs to reach a higher level, and sooner than previously indicated, to ensure inflation returns to within its target range over the medium term. Core consumer price inflation is too high, employment is beyond its maximum sustainable level, and near-term inflation expectations have risen.
Higher interest rates necessary
The Monetary Policy Committee (MPC) has increased the Official Cash Rate (OCR) from 3.5% to 4.25%.
Paul Conway talks about the Monetary Policy Statement
Our Chief Economist Paul Conway explains why the MPC decided to increase the OCR and what it means for you.
Kia ora. I'm Paul Conway, Chief Economist at the Reserve Bank of New Zealand. We have just released our Movember Monetary Policy Statement in which we increased the official cash rate by 75 basis points to 4.25%. We are doing this in an effort to reduce inflation in our economy, which is effectively a pay cut and a tax on your savings, rolled into one.
As in many countries, inflation and New Zealand is currently far too high. This is because demand in our economy is very strong at the moment. Jobs are plentiful and unemployment in New Zealand is near record lows. Global prices for our exports are still comparatively high and the tourism sector is seeing a strong increase in international visitor arrivals. This broad story of excess demand is well known across many countries, and inflation is at or near multi-decade highs in many regions of the world to help ease demand and lower inflation, many central banks globally are increasing interest rates and that includes here at the Reserve Bank of New Zealand.
We are doing this to meet our inflation and employment objectives. We are determined to get inflation back into the target because that is the best contribution that we can make to enabling the wellbeing and prosperity of all New Zealanders.
Thank you.
Monetary Policy snapshots
Demand in the New Zealand economy has remained resilient
- Demand in the New Zealand economy has been resilient to global and domestic headwinds.
- Household spending has stayed elevated, despite high inflation, rising interest rates, falling house prices and uncertainty about the global outlook. Recent spending has been supported by high employment, increasing wages, cost of living payments, and savings built up by households during COVID-19 lockdowns.
- The recovery in international visitors has been faster than expected since our border reopened. This is boosting demand in the tourism and hospitality sectors in particular.
Worker shortages are holding the economy back and increasing inflation
- The unemployment rate remains very low at 3.3 percent, and a record number of New Zealanders are participating in the labour force. Worker shortages are holding back output across many industries and regions. A wide range of indicators continue to point to employment being above its maximum sustainable level.
- Worker shortages are increasing wages and are contributing to high domestic inflation.
- We expect the unemployment rate to stay low in the near term. This is because employers are likely to hold on to existing workers. Instead, they may reduce hiring of new staff or offer fewer work hours in response to the weakening outlook for economic growth.
Global developments are adding to inflation in New Zealand, but weakening our economic growth outlook
- Global developments have driven a large part of the high headline inflation in New Zealand. Increases in commodity and energy prices as a result of the Ukraine war have added to initial inflationary pressures that emerged during the COVID-19 pandemic.
- Inflation is now at or near multi-decade highs in many parts of the world. High inflation globally has led to sharp increases in world prices for the goods that New Zealand imports.
- The weaker outlook for global demand will contribute to lower growth in New Zealand through lower export prices and business investment. Lower global demand will also contribute to lower imported inflation over coming years.
Higher interest rates are needed to meet our inflation and employment objectives
- Annual inflation remains too high in New Zealand, at 7.2 percent. High inflation is due to a mixture of domestic and international factors.
- Measures of persistent or ‘core’ inflation have increased, as have expectations of future inflation. These measures suggest that inflation will remain elevated in the near term.
- The MPC expect that they will need to increase the OCR by more than expected in August to meet their inflation and employment objectives.
- Given that the New Zealand economy is starting from a point of acute labour shortages and high inflation, an economic contraction is likely as economic activity eases from elevated levels. The unemployment rate is expected to increase from very low levels as demand for workers reduces and the labour force grows.