Editorial: Could more data on inflation have headed off the Reserve Bank from lifting the OCR?

The Reserve Bank hiked the official cash rate by 50 basis points to 5.25 per cent on April 5, working off inflation data from the December quarter. Photo / Mark Mitchell

Editorial

EDITORIAL

The surprise drop in the inflation rate comes as welcome news but is also frustrating from a borrower’s point of view.

One can’t help wondering whether, had we known the rate was on the way back down, it could have headed off the need for the Reserve Bank to go as fast and hard as it has on lifting the official cash rate (OCR).

Illustration / Rod Emmerson

Yesterday, Stats NZ revealed the inflation rate for the year to March had dropped to 6.7 per cent, down from 7.2 per cent in the year to December.

It was much lower than economists had predicted and well down on the Reserve Bank forecast of 7.3 per cent.

Inflation data is released monthly in other countries, allowing central banks much more timely information to help make decisions on monetary policy and the official cash rate.

In the United States, the inflation rate is released monthly and has been clearly falling. In January it was 6.4 per cent and by March it was 5 per cent. Its next data release will be on May 10.

Likewise in Australia, monthly data has shown a drop from 7.4 per cent in January to 6.8 per cent in February.

That information would have fed into the Reserve Bank of Australia’s decision to keep its cash rate on hold at 3.6 per cent.

When the Reserve Bank of New Zealand made its call to hike the official cash rate by 50 basis points to 5.25 per cent on April 5, it was working from inflation data that harked back to the December quarter.

The 7.2 per cent inflation rate for the year to December was only marginally lower than the peak of 7.3 per cent and with cyclone and weather impacts expected to push inflation higher, the pressure was on to keep hiking the rate.

But had it been clear that inflation was already starting to trend down, then the Reserve Bank could have taken a very different approach - perhaps hiking by just 25 basis points or even going into a holding pattern as occurred in Australia.

New Zealand has a poor track record for collecting data and publishing it on a regular basis.

But this information is vital when making policy decisions in the running of our country and for monetary policy.

New Zealand’s OCR has had the steepest rise in the country’s history. In April last year, it was sitting at just 1.5 per cent and now it is 5.25 per cent.

Mortgage holders are feeling the pain already and around half of borrowers are still to switch from rates in the 3s and 4s to more than 7 per cent.

Mortgage arrears are starting to rise, although they remain below pre-Covid levels and mortgagee sales are still at record low levels.

Unemployment is currently low but, if this were to rise quickly, the picture could look quite different.

More data would help provide a much clearer and more timely steer on where New Zealand is headed.