OCR

PHOTO: RBNZ – The Reserve Bank of New Zealand. FILE

The Reserve Bank is expected to hike the official cash rate (OCR) on Wednesday as New Zealand experiences the highest level of inflation in decades.

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After sitting at 0.25 percent for months during the pandemic, a series of consecutive 25 basis point increases since October last year has seen the OCR reach 1 percent and it’s widely anticipated to continue to rise, likely meaning a jump in interest rates.

In its preview of the decision, ANZ said the Reserve Bank needed to make a big move to “rein in runaway inflation” and the “sooner they rip into it, the lower the economic cost is likely to be”.

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It’s predicting a 50 basis point increase, which would be the largest increase to the OCR since May 2000. Normally jumps to the OCR come in 0.25 basis point stages, though the central bank does make bigger moves pulling it down, such as a -1.50 basis point move during the height of the global financial crisis and -0.75 basis points at the start of the COVID-19 pandemic.

“The Reserve Bank is between something of a rock and a hard place,” ANZ said in its report.

“On the one hand, the path ahead for the economy is looking anything but smooth, with house prices falling and consumer confidence pummelled as household budgets are squeezed. On the other hand, the wall of inflation is vertical and so far, completely unyielding.

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“Normally, near-term downside growth risks are a recipe for at least caution on the part of central banks, if not outright largesse. But this time, one key thing is very, very different – inflation.”

There are risks to raising the OCR in large increments, mostly with the housing market, ANZ said, but “the RBNZ now has to play the hand it’s got”.

Reserve Bank Governor Adrian Orr.
Reserve Bank Governor Adrian Orr. Photo credit: Getty Images.

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