Official interest rate hiked as inflation continues to bite

Source: 1News

Surging prices have led the Reserve Bank to raise the official interest rate by 0.5%-points to 2%.

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The Monetary Policy Committee increased the Official Cash Rate (OCR) "to continue to tighten monetary conditions at pace to maintain price stability and support maximum sustainable employment".

It said that a "larger and earlier increase in the OCR reduces the risk of inflation becoming persistent, while also providing more policy flexibility ahead in light of the highly uncertain global economic environment".

The move in the OCR comes after inflation hit levels not seen in decades as a result of supply line issues caused by the pandemic and energy and food price hikes due to the war in Ukraine.

People with non-fixed mortgages will feel the pain of the latest hike while savers are likely to benefit.

Today's rise follows a similar rise by 0.5%-points to 1.5% in April, after rising by 0.25 in February this year, and the same amount in November and October 2021.

National's Nicola Willis said the 50 basis point increase "means more pain on the horizon for anyone with a mortgage".

"Rising interest rates will be difficult news for Kiwis already battling the cost of living crisis."

The Reserve Bank predicts an increase for June 2023 up to 3.9% - with February's peak forecast at 3.4% for late 2024.

The OCR yearly average projection for 2023 is 2.9%, 3.9% in 2024 and 3.8% in 2025.

The Committee said that once supply and demand "are more in balance", the OCR can move to a lower level.

The OCR had remained at 0.25% from March 2020 to August 2021, after it dropped by 0.75%-points from 1% in March 2020.

In April, the Reserve Bank Monetary Policy Committee said an increase was needed to try to keep prices stable and support high employment levels.

The Reserve Bank found in 2021 that moves in the OCR typically have the biggest impact on shorter term mortgage rates, usually of a year or less.

READ MORE: The Reserve Bank set to raise its benchmark interest rate to its highest level in six years as it rejoins the battle with surging inflation.

It comes as inflation hit 6.9% in April, which was the the largest movement since June 1990.

ANZ Chief Economist Sharon Zollner told 1News last month that while interest rates affect "an awful lot of people – inflation affects everybody".

“Essentially, [the Reserve Bank] think the neutral OCR, the rate at which they’re neither on the accelerator or the brake, is probably around 2%," she said at the time.

“So, their strategy seems to be get to there quickly and then maybe see how things are looking and perhaps take it a little easier from there.”

Zollner said inflation is a global issue that isn’t just affecting New Zealand and that while the country may be in for a bumpy ride, she’s hopeful of a “soft landing”.