Reserve Bank Governor Adrian Orr and the monetary policy committee say they needed to push harder against the market in order to ensure borrowing rates stay at current levels.
In other words, today’s announcement isn’t likely to send fixed-rate mortgages to much higher levels.
This might be some small relief for concerned homeowners but any expectation that rates could be falling again in the near future has been blown out of the water.
Financial market pricing for two-year rates rose, as did the kiwi dollar.
It was a hawkish move from a governor who, just a year ago, was being accused of being too generous with stimulatory policy and too soft on inflation.
Orr now faces criticism that the economy is being squeezed too much and the risk of a hard landing - and deep recession - is too high.
Jarden economist John Carran described the move as “myopic” “with little consideration of the lags with which monetary policy influences the economy.”
Had there been a press conference, the RBNZ’s counter-argument would likely be that having come this far we need to ensure that the job on inflation is done.
Clearly, the RBNZ was concerned about markets - and borrowers - relaxing too early.
“Wholesale interest rates have fallen significantly since the February Statement, and this could put downward pressure on lending rates,” Orr said.
“As a result, a 50-basis-point increase in the OCR was seen as helping to maintain the current lending rates faced by businesses and households, while also supporting an increase in retail deposit rates.”
Basically, the global banking woes of the last month have pushed the US Federal Reserve into a more cautious monetary policy stance and eased rate pressure around the world.
The RBNZ noted that those banking woes don’t extend to our part of the world and we aren’t in a position to enjoy those lower rates.
“The committee’s assessment is that there is no material conflict between lowering inflation and maintaining financial stability in New Zealand,” it said.
The hike takes the rate to 5.25 per cent, the highest since 2008, but it is the fastest hiking cycle in history.
Despite the market shock a peak of 5.25 per cent was already priced into the outlook. It appears the RBNZ decided it might as well get there sooner rather than later.
In fact, it said as much: “Members agreed that the sooner supply and demand were better matched in the economy, the lower the overall cost of reducing inflation.”
It raises the possibility that this could be the last hike in this cycle, although clearly that hangs on how economic data lands in the next two months.
Yesterday, Australia’s Reserve Bank paused its hiking cycle leaving the OCR at 3.6 per cent.
But inflation in Australia has also shown more signs of easing - down to just 6.8 per cent for the year to February.
In New Zealand, the latest data we have is to December 31 - an annual rate of 7.2 per cent.
However, the Reserve Bank cited fears that we will likely see further inflationary pressure come on in the wake of the summer’s flooding and cyclone.
“The recent severe weather events in the North Island have led to higher prices for some goods and services,” Orr said.
