Reserve Bank Governor Adrian Orr. Photo / Mike Scott.
Reserve Bank Governor Adrian Orr. Photo / Mike Scott.
The Reserve Bank signalled it may hit markets with a double-sized interest rate hike - the first in more than 20 years - as it warned inflation is likely to rise above 6 per cent this year.
In the first meeting of the year, the monetary policy committee hiked theofficial cash rate (OCR) by 25 basis points to 1 per cent, and indicated many on the committee had been tossing up whether to instigate an unusually large 50-point hike.
Governor Adrian Orr also announced a reduction in its bond-buying programme, gradually allowing bonds to mature and selling into the market.
The Reserve Bank has not hiked the OCR by more than 0.25 per cent at a single meeting since May 2000, a year after the cash rate was introduced to help the central bank inflation.
Wednesday's meeting saw the committee confirm it "was willing to move the OCR in larger increments if required".
The warning came as the Reserve Bank raised its forecast for inflation, saying it expected the consumer price index to peak at 6.6 per cent in the current quarter and there were upside risks to even this.
Aiming to keep inflation as close as possible to the middle of a 1-3 per cent target, the Reserve Bank does not see annual inflation falling to 2 per cent until 2025.
At its last update in November, the Reserve Bank indicated the OCR would peak at around 2.6 per cent, but Wednesday's statement suggested the cash rate could rise to around 3.35 per cent over the next three years.
The Reserve Bank sees house prices falling by 9 per cent over the next two-and-a-half years, while inflation is likely to peak at 6.6 per cent. Photo / Fiona Goodall
The interest rates on savings and mortgages have already been rising sharply since August on expectations of OCR hikes, nevertheless economists said Wednesday's statement was markedly hawkish.
ANZ chief economist Sharon Zollner said while the Reserve Bank saw downside risks to the economy from the current Omicron outbreak, it seemed focused on the risk of rising inflation expectations.
"The most significant risk to be avoided at present was longer-term inflation expectations rising above the target and becoming embedded in future price setting," the Reserve Bank said.
Stephen Toplis, head of research at BNZ, said with Omicron "exploding" across New Zealand it was unlikely that the Reserve Bank would be confident enough about the economic outlook at its next meeting in April, but appeared to be "setting the market up" for a 50 basis point increase in May.
While Wednesday's increase was expected, some forecasters said the Reserve Bank should have moved faster.
"The Reserve Bank is losing control of inflation," Brad Olsen, principal economist at Infometrics, said.
"The Reserve Bank has got two jobs. Keep inflation stable, and keep employment around the maximum level. It's currently failing on both of those, it acknowledges that."
Jarden economist John Carran said by signalling a sharper increase in the OCR over the next three years and signalling bond sales, the Reserve Bank had significantly tightened monetary policy while giving itself more scope to adjust in the coming months.
Carran expects that ultimately the Reserve Bank will increase the OCR by less than it is forecasting as it becomes clearer "that the New Zealand economy is starting to cool" with house prices already starting to fall.
"Rising mortgage interest rates, tougher bank lending standards, and the lagged impact of tougher loan-to-value restrictions and tax changes that disadvantage some housing investors will likely continue the housing market slowdown."
Wednesday's statement showed the Reserve Bank expects house prices to fall further than in November, dropping by about 9 per cent over the next two-and-a-half years.
"The assumed slowdown in prices also reflects a significant increase in[the] supply of new homes at a time when there is near-zero net migration."
Orr conceded asset prices were notoriously difficult to predict accurately but the Reserve Bank was confident house prices would move to a "more sustainable" level.
"We're more confident in the direction than the magnitude."
