Early signs of inflation slowing have followed the Reserve Bank’s decision to lift the official cash rate by 50 basis points.
Yesterday it was announced the official cash rate would rise from 4.25% to 4.75%.
The official cash rate, or OCR, is a tool used by the Reserve Bank to fight inflation. It affects interest rates, which means those with credit card debt and mortgages will have to pay more interest. However, people who save will make more of those savings.
Reserve Bank Governor Adrian Orr told Breakfast inflation and the OCR were tracking as expected, but unexpected economic events, like Cyclone Gabrielle, were making things difficult.
“We see things tracking, as anticipated; it’s not about how many movies you’ve had; it's from where you’ve started and where you’ve got to,” he said.
“We started from exceptionally low levels of interest rates, very stimulatory - as we came through the Covid period.
He said the economy had moved a long way from where it was before.
“Now we are in a position where we are unambiguously restrictive on demand, and we're seeing demand starting to ease.
“Meanwhile, we keep getting hit by a series of economic shocks, the most recent being these severe weather events.”
The financial market fully anticipated the boost, Orr said, which means most Kiwis will already have the OCR rise incorporated into their interest rates and mortgages.
The OCR is typically used to influence how people use their money; Orr said that while the bank stays neutral, this latest boost encourages saving over spending.
“We’ve been very clear about where we believe a neutral interest rate is, where we’re neither pushing savings rates nor spending.
“We need to be above that; we need to constrain the spending a bit because, at the moment, demand is still outpacing supply, so the ongoing interest rates were necessary.”
He said that these actions should see inflation slowly start to go down.
Orr expects it to be down at 5% by the end of this year and back to under 3% by the end of 2024.
“It is working; there are early signs of inflation slowing; we expect inflation to be down at 5% by the end of the year and, then, back under 3% by the end of next year.
“The alternative is high and rising inflation, which is evil,” he said.
Orr said the Reserve Bank also predicts 1% to be added to the GDP, as construction companies, who have been struggling to fill the books, will be very busy with cyclone recovery.
SHARE ME