The case for tightening became sufficiently compelling for the Reserve Bank of New Zealand (RBNZ) to raise interest rates today, lifting the Official Cash Rate (OCR) 0.25 percentage points to 2.75%.
As you know, we believe the case for
tightening has been compelling for a while.
That’s for all the reasons the RBNZ outlined today: New Zealand’s economic
expansion has considerable momentum, growth in demand has been absorbing spare
capacity and inflationary pressures are becoming apparent, especially in the
There was unanimity of view in the market
that the Bank would move today. That
meant the main point of interest was the forward track for interest rates. In extending the forecast rate track out to March
2017 the RBNZ has signalled a rise in interest rates (90-day bills) to 5.3% at
the end of the period which implies an OCR of around 5.0% or a tad more. That’s consistent with our view of a peak in
the OCR cycle of around 5.0-5.5% as outlined in our recent paper “The New Zealand Tightening Cycle” which
you can read here.
The RBNZ is often criticised for stomping
on growth as soon as it gets going. The most
important factor for the RBNZ is not the absolute rate of growth but rather how
the economy is growing relative to its potential to grow. What the RBNZ has done today is start a
process whereby some heat gets taken out of the cycle which will ultimately
help extend the longevity of the expansion.