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Home / Business / Economy / Official Cash Rate

Reserve Bank leaves OCR unchanged: Kiwi dollar soars on inflation outlook

Liam Dann
By Liam Dann
Business Editor at Large·NZ Herald·
26 May, 2021 02:03 AM3 mins to read

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Business Editor at Large Liam Dann explains the Official Cash Rate, and how the Reserve Bank sets the OCR to influence the economy.

The Reserve Bank has left the official cash rate unchanged at a record low of 0.25 in its latest Monetary Policy Statement.

But it now has forecasts which imply it will begin hiking rates in the second half of next year.

The decision to keep the cash rate on hold was widely expected by economists.

Reserve Bank Governor Adrian Orr said the RBNZ saw inflation reaching 2.6 per cent in the second quarter of this year.

The kiwi dollar rose sharply after the announcement - up by more than one per cent to US73.03c, from US72.30c.

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The bond-buying (quantitative easing) programme will remain unchanged.

"The global economic outlook has continued to improve, with ongoing fiscal and monetary stimulus underpinning the recovery," Orr said in the statement.

New Zealand's commodity export prices had benefited from this rise in global demand, he noted.

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However, the sustainability of the global economic recovery remained dependent on the containment of Covid-19.

"While economic growth in New Zealand slowed over the summer months following an earlier strong rebound, construction activity remains robust," Orr said.

"The aggregate level of employment has also proved resilient, while fiscal spending continues to support domestic economic activity."

The biggest bet in global economics right now is on whether post-Covid inflation will prove to be a short-term blip or a more persistent structural problem.

At issue is whether central banks, like the US Federal Reserve, will be able to hold the line on low rates or whether they'll be forced to hike, to head off inflation.

The RBNZ continues to play its cards close to its chest on when a rate hike will be needed.

The Monetary Policy Committee said it would maintain its current stimulatory monetary settings until it was confident that consumer price inflation will be sustained near the 2 per cent per annum target midpoint, and that employment is at its maximum sustainable level.

"Meeting these requirements will necessitate considerable time and patience," Orr said.

However the RBNZ's forecasts now suggest it is on track to begin lifting the rate in the second half of 2022.

That is inline with the market consensus, prior to today's statement.

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ASB chief economist Nick Tuffley said there were signs of "tentative shifts in tone" in the statement.

These included the RBNZ dropping its explicit mention of its willingness to cut the OCR further and its publishing of a rates track for the first time in a long while.

"We were a little surprised to see the bank be so forthcoming," he said. "While we share the RBNZ's view that the OCR will move up in 2022, their pace of hikes over the next few years is larger than what we envisage."

Today's new forecasts suggest rates may need to be lifted to around 1.5 per cent by end-2023, said Capital Economics.

"With the RBNZ set to become one of the first central banks in advanced economies to hike rates, we think that the New Zealand dollar will continue to strengthen against the US dollar," said senior Australia & New Zealand Economist, Marcel Thieliant.

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