The Reserve Bank of New Zealand (RBNZ) raised the official cash rate (OCR) from 4.25% to 4.75% earlier this month, and implied that at least one more rate rise is coming.
In a statement explaining the decision, the Monetary Policy Committee of the RBNZ gave two main reasons for the rate rise.
- Inflation is too high – it was 7.2% in the December quarter, which is well above the RBNZ’s target range of 1-3%
- Employment is “beyond its maximum sustainable level” – the unemployment rate was a very low 3.4% in the December quarter
Inflation
The Committee expressed concern about inflation, in part because it said that demand continued to outpace supply.
“Measures of persistent or ‘core’ inflation have remained very high, indicating that high inflation remains broad-based,” the Committee said in its statement.
“Medium- and longer-term inflation expectations have stabilised recently, but remain elevated. The potential for a persistent continuation of global and domestic supply constraints, greater persistence in core inflation and elevated inflation expectations were seen as upside risks to the economic projections.”
Unemployment
The Committee also expressed concern about labour shortages, which it said were contributing to strong wage inflation.
“Measures of labour force utilisation are near record levels and firms continue to report severe difficulties finding labour. Private sector employees are also transitioning between jobs at an elevated pace, consistent with significant labour shortages and strong demand in the economy,” it said.
The outlook
Nothing is guaranteed, but it seems likely that at least one more rate rise is coming.
In its statement, the Committee said it had seriously considered increasing the OCR by 0.75 percentage points, rather than the 0.50 percentage points it eventually chose.
The Committee said “the balance of risks around inflation remain skewed to the upside”.
Also, members agreed “the OCR needed to reach a level where the Committee could be confident it would reduce actual inflation to within the target range over the forecast horizon” – implying it wasn’t there yet.
So when the Committee holds its next meeting, on April 5, there’s a good chance it will announce another rate rise.