Take Five: Key questions about the Reserve Bank’s rate hike answered

The Reserve Bank kept his blinders on inflation by raising the official spot rate by 50 basis points on Wednesday’s monetary policy review, pushing the rate from 2% to 2.5%.

Economists were looking for clues from the Reserve Bank that growing fears of an economic downturn could distract it from its newly rekindled fight against inflation.

READ MORE:
† Reserve Bank keeps blinders on inflation and raises OCR to 2.5%
† Official cash interest rates are going up, but what does that mean for interest rates?
† Bankers watch for signs of recession tensions from Reserve Bank on Wednesday

So what did the Reserve Bank say?

The central bank succinctly acknowledged what it described as “mid-term emerging downside risks to economic activity”.

But the overall message was clear; that it remained very focused on bringing inflation back within the 1% to 3% target.

The Reserve Bank described inflationary pressures as “comprehensive,” with language and a tone that ASB and ANZ considered more or less unchanged from its aggressive monetary policy statement in May.

It also said it was “generally comfortable” with its May forecast, which would see the OCR peak at 4% in the second half of next year.

Were there any surprises?

No.

Economists sometimes differ in their predictions of what the Reserve Bank will do with the OCR, and at times, even the majority have been misled by the bank.

But not this time, when she and the Reserve Bank all seemed to be on the same page.

That’s not to say that every senior economist thinks a 50 basis point “double rise” was really necessary, looking at current economic data, but they all expected it.

It’s also no surprise that the Reserve Bank didn’t wink much at growing speculation around the world and in New Zealand that recessions are in the pipeline.

The assumption was that whatever the members of its monetary policy committee cherish privately about the economic outlook, they wouldn’t want the Reserve Bank to show any public sign that it was losing its new, narrow focus on strangling inflation until it sees more. had confidence that it was ‘work done’.

What does this mean for savers and borrowers?

Nothing very dramatic.

Mortgage holders probably don’t need to worry too much about the rate hike, which appears to be fully priced into longer-term mortgage rates.

The New Zealand dollar and swap rates fell slightly initially, presumably because of the Reserve Bank’s reference to emerging downside economic risks.

But at least the dollar backed out as a consensus emerged Wednesday afternoon that the real message from the Reserve Bank was to hold on to its weapons in the fight against inflation.

Retail interest rates could continue to shift a bit in the coming hours, days and weeks as forecasters digest the Reserve Bank’s commentary and new economic data and place their next bets.

Will the rate hike work to curb inflation?

Tough question because there are many moving pieces in that puzzle, but the conventional view is that it should have some effect.

The current wave of inflation is largely attributed to supply chain problems caused by Covid and Russia’s war on Ukraine, as well as previously low interest rates and the $53 billion of liquidity pumped into the financial system through the US’s $53 billion quantitative easing program. Reserve Bank.

It is sometimes noted that rate hikes will do nothing to alleviate the supply chain problems that are one of the causes of inflation.

But reducing demand in the economy should generally lead to lower price increases regardless of the cause of inflation, at least in the short term.

What will the Reserve Bank’s next step be?

The Reserve Bank will have another scheduled opportunity to reset OCR in just five weeks when it issues its next monetary policy statement on August 17.

Most economists expect it to increase OCR by another 50 bps to 3%.

But even though it’s a short time between resets, a lot of important data will be released between now and then.

Stats NZ in particular will release inflation data for the June quarter on Monday.

If it turns out that annual inflation is still rising, the assumption that the Reserve Bank will increase OCR by another 50 bps next month may become even stronger.

But if the June quarter data suggests that annual inflation has peaked, then a smaller gain of 25 bps and an earlier change in tone from the Reserve Bank becomes more likely.

June 3 labor market data, which could see official unemployment reach (or retreat from) a recent record high, could also easily tip the balance.