Reserve Bank lifts official cash rate by another 0.25%

The official cash rate (OCR) has been lifted 25 basis points to 5.50% by the Reserve Bank of New Zealand today.

An increase was widely tipped by economists as the central bank continues its effort to try and reduce inflation.

It comes as the latest figures released at the end of April have New Zealand's inflation rate at 6.7%, slightly down from 7.2%.

The move is the 12th straight increase in the OCR.

The latest OCR rise will likely mean more bad news for people looking to re-fix mortgages, and those on floating rates.

However, it's not all bad news as anyone who is lucky enough to have a bit of a nest egg will be slightly happier, as their savings will likely earn them more if rates rise again.

But with inflation still high that extra money might not be quite enough to take the sting out of the higher cost of living.

Deanna Woodfield, who is awaiting the construction of her first home in Auckland, said it had been “very stressful” watching interest rates rise.

She estimated that she will be paying an extra $200 to $300 a week on her mortgage when compared to when she first did her budget, and it was frustrating she was unable to lock in mortgage rates as the completion date on her Mt Wellington townhouse kept changing.

“It’s been a very stressful time but I’ll just have to make it work because it’s important,” she said before the announcement.

“Having my own space and getting into the property market here in Auckland is always been something I’ve wanted to do.”

The Reserve Bank of NZ this afternoon said the OCR will, "need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1% to 3% annual target range, while supporting maximum sustainable employment".

"In New Zealand, inflation is expected to continue to decline from its peak and with it measures of inflation expectations. However, core inflation pressures will remain until capacity constraints ease further. While employment is above its maximum sustainable level, there are now signs of labour shortages easing and vacancies declining."

The Reserve Bank stated that its measures to slow down rising house prices and consumer demand appear to be working.

"Consumer spending growth has eased and residential construction activity has declined, while house prices have returned to more sustainable levels. More generally, businesses are reporting slower demand for their goods and services, and weak investment intentions. Businesses report that a lack of demand, rather than labour shortages, is now the main constraint on activity."

ANZ's chief economist Sharon Zollner predicted today's 25 basis point rise and said it's unlikely to peak there.

"We are forecasting now that the Reserve Bank won't be done now, which was our forecast, but they will hike at least one more time," Zollner said.

She said it appears the point at which it will be prepared to halt the rate hikes and see what happens to the economy "keeps getting pushed out".

Institute of Economic Research principal economist Christina Leung earlier today explained the pressures affecting New Zealand as compared to other major economies.

"The more we're cranking up interest rates more than other major economies, it does make it much more attractive for investors to be parking their money here in New Zealand. So that tends to push up the dollar," the economist told Breakfast.

"Now, what that will means for our economy is that you do tend to see imports become a bit cheaper. You see that comes through, for example, in petrol prices at the pump.

"But what it also means is that — for exporters, they become less competitive in the market. They tend to get less in terms of the goods and services that they sell overseas."

Asked about the Reserve Bank's OCR decision before it was released today, Prime Minister Chris Hipkins said when the Government put together the budget, it "did carefully consider" the commentary provided in the last official cash rate decision.

The Reserve Bank had wanted the Government to reprioritise to contribute to the cost of recovery from Cyclone Gabrielle and other weather events, and wanted to see government spending decline over the forecast period, he said.

Hipkins said the Government had done both of those things.

"We're doing our bit. 

"Ultimately the Reserve Bank has to do its bit though and they do that independently of the Government."

Asked if he would take responsibility if the official cash rate rose, Hipkins said it was important to acknowledge "events" from the beginning of the year that would have an impact on inflation "beyond the Government's control" - the cyclone and floods.

"We said that we were going to see these communities through that, there's an inflationary effect of that."

He said the alternative was to not address those issues which was not up for consideration.

He added it was a "difficult time" for homeowners facing rising interest costs.