RBNZ Ups OCR 25bps to 1.0%, Issues Projection For Higher Peak

By Sophia Rodrigues

--Raises OCR 25bps to 1%
--Sees OCR at 2.2% in Dec (up from 2.1%)
--Sees OCR at 3.3% in Dec 2023 (up from 2.6%)
--Sees OCR at 3.4% in March 2025 (previously 2.6% Dec 2024)
--Will not reinvest bond maturities
--Sell NZ bonds at NZ$5B per fiscal year to NZ debt management
--Households, firms more sensitive to rate hikes as debt levels high

(Sydney, February 23, 2022)—The Reserve Bank of New Zealand raised the official cash rate and issued a hawkish outlook by pointing to the need for OCR to rise as high as 3.4% to get inflation to the mid-point of target band by the end of forecast period.

The OCR was increased by 25bps to 1.0%, marking it three rates hikes in a row, with more expected as the central bank acted to deal with rising inflation pressures. The projections showed the OCR rising to 2.2% by end-2022, 3.3% by end-2023 and 3.4% by September 2024, and inflation at target mid-point only by March 2025.

The RBNZ also announced it will not reinvest the proceeds of any upcoming maturities of government bonds in its portfolio and it will directly sell bonds at the rate of NZ$5 billion per fiscal year to the nation’s debt management unit. Non-government bonds will be held until maturity, the RBNZ added.

“The Committee agreed that further removal of monetary policy stimulus is expected over time given the medium-term outlook for growth and employment, and the upside risks to inflation,” the RBNZ said in a statement Wednesday.

The decision was a close one between a 50bps hike and 25bps, but the RBNZ settled for the latter by signalling a high peak for the OCR than assumed in November and its expectation that bond sales may put some upward pressure on longer-term interest rates.

At the same time, the RBNZ kept the door open for bigger rate hike at future meetings if it saw signs that longer-term inflation expectations were getting unanchored from the target.

“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 RBNZ said.

--Contact: Sophia@centralbankintel.com