The Reserve Bank has raised the official cash rate by 0.25 percentage points to 0.5 per cent, as predicted by economists .
It’s the first time the central bank has increased the benchmark rate in seven years, as it aimed to tackle rising inflation.
It also follows months of holding the OCR at a record low of 0.25 per cent, in response to the economic slowdown triggered by the Covid-19 pandemic.
It’s good news for those saving money as the increase in the OCR means the interest that banks pay out for savings accounts increases. But, it's not the best news for those with a mortgage.
Banks reacted to the change within minutes on Wednesday afternoon, including ANZ and Kiwibank which both increased their floating lending rates.
Meanwhile, ASB committed to holding their current interest rate on its most common small business loan until the end of 2021. Its variable home loan lending rate is also unchanged.
The Reserve Bank said now was the right time to continue reducing stimulus, with New Zealand’s public health setting “evolving as domestic vaccination rates rise”.
“The level of global economic activity has continued to recover, supported by accommodative monetary and fiscal settings, and rising vaccination rates enabling a relaxation of mobility restrictions,” the Reserve Bank noted in a statement.
“While economic uncertainty remains elevated due to the prevalent impact of Covid-19, cost pressures are becoming more persistent and some central banks have started the process of reducing monetary policy stimulus.”
It signalled a further removal of monetary policy stimulus over time.
The Monetary Policy Committee noted the impacts businesses, especially in Auckland, were facing because of the latest alert level shifts. However, it said it needed to continue to act in a way that would keep inflation at about 2 per cent and maintain maximum sustainable employment.
“The Committee noted that near-term growth will remain volatile, and will depend on the speed and extent to which public health restrictions are eased.
“However, the experience of last year suggests that timely Government support for business and jobs is effective at cushioning the near-term impact on economic activity.”
The central bank also reiterated its objective to support sustainable house prices as monetary stimulus is reduced.
Jarden economist John Carran said New Zealand can expect at least two more 0.25 percentage points OCR hikes in November and February, barring any major shocks to the economy locally or overseas.
But, beyond February, OCR prospects were "more clouded", he said.
"Power shortages in China are restraining production in that country and exacerbating cost pressures and capacity constraints globally, which could prolong the supply side situation.
"However, there are increasing risks to spending, particularly if China’s production problems impact spending by its households, which could see New Zealand’s exports to China suffer."
Carran said if steep cost rises and uncertainty about the economy led businesses to pull back on investment or hiring plans, it could dampen people's spending.
"Spending could further be inhibited if New Zealand house prices materially wane as a result of recent tightening in LVR restrictions and Government tax changes."
National’s shadow treasurer Andrew Bayly said the raise today showed the Reserve Bank “has been forced to make the risky move” while Auckland and Hamilton remain in Alert Level 3.
“The Government’s failure to rollout the vaccine and prepare our Covid defences has resulted in the Reserve Bank having to make this decision in the middle of lockdown, which is incredibly risky for the economy,” he said.
“Obviously, the Reserve Bank has seen that the cost of living is rising too quickly, and its hand has been forced. This has been exacerbated by huge amounts of wasteful, untargeted spending from the Government on matters entirely unrelated to the Covid response.
“As a result of the Government’s lack of fiscal discipline and failure to prepare for another Covid outbreak, mortgage-holders and businesses are now set to face rising interest costs at a time they can least afford it.”
Meanwhile, ACT Party leader David Seymour said the increase in the OCR marked “the sound of reality returning to the New Zealand economy”.
“When the cost of borrowing money comes back to the price people expect for lending it, we're going to see the costs, not only of mortgages, but also government debt, increasing. This is a wakeup call for the public and private sector,” he said.
“The Government and its economic policies will have to be focused on growth, rather than redistribution.”
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