The Official Cash Rate has been lifted 50 basis points to 4.75% in the Reserve Bank of New Zealand's first policy announcement for the year.
Economists had forecast the increase in the run up to today's announcement, as the central bank continues with its efforts to try and reduce inflation. The OCR is expected to peak at 5%, though it's no longer thought to hit the 5.5% that was originally forecast.
Today's decision has been made against the backdrop of the devastating storms that have hit the northern and eastern parts of New Zealand this summer, the repair costs of which are forecast to be in the billions.
"It is too early to accurately assess the monetary policy implications of these weather events, given that the scale of destruction and economic disruption are only now becoming evident," the bank said.
"The timing, size, and the nature of funding the Government’s fiscal response are also yet to be determined."
In the wake of the latest storm, Cyclone Gabrielle, Kiwibank chief economists Jarrod Kerr and senior economist Mary Jo Vergara called for a temporary pause on further hikes.
"It's a decision we believe can be postponed until April," they wrote in their latest economic report. "Temporary relief, of all kinds, is needed in the time of crisis...A pause from the RBNZ could point to a resumption of rate hikes from April if required."
READ MORE: What is the OCR and how does it affect our lives?
It's put the Official Cash Rate up to 50 basis points in an effort to dampen inflation. (Source: 1News)
Head of Devon Funds, Greg Smith, also told Breakfast this morning a pause was warranted in these conditions, but a good middle ground would be a smaller hike of 25bps.
"They could factor in a number of things, yes inflation is going to go up short-term. We've seen the tremendous damage to the crops, in the producing regions that's going to drive up food prices, homes are going to need to be repaired and rebuilt, that's going to drive up construction costs, insurance premiums are going to go up."
But Smith said the huge repair bill New Zealand was facing also created the risk of a recession.
"They could pay some homage to that, no-one knows how it's going to play out."
But BNZ's economic team did not see the weather-related damage as cause for the Reserve Bank to scale back in its planned cash rate hikes.
It's latest report said; "Awful as the impacts are, and will be, on communities and businesses in the affected regions, they are likely to sustain the inflation pressure that's already running rife in the economy. This is especially once the restocking, replacement and rebuilding phase gets underway.
"When emotion is (understandably) running high, it's easy to forget the RBNZ's main job is to deliver low and stable inflation."
The general theory is that when the OCR rises, it costs more to borrow money, encouraging people to save rather than spend. The official cash rate is the interest rates at which the commercial banks like ANZ, ASB, BNZ and Westpac borrow - affecting the interest rates charged on people's mortgages, credit cards and other loans. So as people begin to feel the increased cost of borrowing, they spend less. That lessens the demand for goods, businesses become more competitive, and that can result in lower prices and a drop in inflation.
At the moment Statistics New Zealand data shows inflation is at 7.2%, which is lower than the central bank forecast of 7.5% for the start of 2023.
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