Reserve Bank poised to increase OCR

PHOTO: Photo: 123RF

The Reserve Bank (RBNZ) looks set to deliver a rise in the official cash rate this Wednesday – something that has not happened in seven years.

The calls from financial markets and economists have grown to a crescendo in the two weeks since official numbers showed a dramatic fall in unemployment to 4 percent, with a sharp decline in underutilisation, strong job creation, and a pick-up in wages.

Those numbers only added fuel to the rate-rise fire, which had been burning fiercely as annual consumer inflation hit 3.3 percent, and news headlines were filled daily with stories of supply disruptions and labour shortages pushing up prices.

“The economy is stretched to bursting, we are at or through maximum sustainable employment, and inflationary pressures are rising almost exponentially,” BNZ head of research Stephen Toplis said.

When the Covid-19 pandemic hit 18 months ago the RBNZ, like central banks around the world, reached into the monetary policy first aid kit and slashed the OCR to a record low 0.25 percent, started buying government bonds to keep a lid on interest rates, and took a range of other measures to ensure there was plenty of cheap cash for banks, businesses, and households.

That helped to ward off the worst effects of recession, business failures, while wage subsidies and mortgage holidays kept people in work and spending.