The Reserve Bank of New Zealand has lifted the Official Cash Rate (OCR) by 25 basis points to 2.75%, saying a gradual withdrawal of monetary stimulus is needed to bring inflation back under control.
The Monetary Policy Committee reached a consensus on the increase at its September 2 meeting and says further increases may be required depending on the economic outlook.
Annual inflation increased to 4.1% in the June quarter, above the Reserve Bank’s 1% to 3% target range, largely as a result of higher fuel prices stemming from the conflict in the Middle East.
However, the bank expects inflation to return to the target range by mid-2027 and reach its 2% midpoint later next year.
Excluding vehicle fuels, annual inflation fell to 2.9% in the June quarter, while most measures of core inflation are already within the target range.
The Reserve Bank says New Zealand’s economic recovery is likely to have resumed following lacklustre growth in the June quarter, although conditions remain uneven across sectors and regions.
Strong export prices and resilient demand from trading partners are supporting income and investment in export-focused sectors and regional New Zealand.
In contrast, weak income growth, job insecurity and flat house prices continue to weigh on household spending and residential investment, particularly in Auckland and Wellington.
The committee says unemployment remains elevated, particularly in Auckland and Wellington and among young and long-term unemployed people.
Household saving has increased and consumption growth remains weak, although the Reserve Bank expects spending to gradually strengthen as employment and incomes recover.
Financial conditions have already tightened, with higher wholesale interest rates flowing through to increased mortgage and business lending rates and contributing to a small appreciation in the New Zealand dollar.
The committee says gradually increasing the OCR now reduces the risk of having to make larger increases later.
“Future policy decisions will depend on the Committee’s judgement of the balance of risks to medium-term inflation.”
The committee says the future OCR path is not predetermined, but under its central economic outlook the rate may need to increase further.
