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Reserve Bank hikes OCR to 1 per cent, forecasts higher peak of 3.25 per cent

Author
Liam Dann, NZ Herald,
Publish Date
Wed, 23 Feb 2022, 2:43PM

Reserve Bank hikes OCR to 1 per cent, forecasts higher peak of 3.25 per cent

Author
Liam Dann, NZ Herald,
Publish Date
Wed, 23 Feb 2022, 2:43PM

The Reserve Bank has lifted the official cash rate (OCR) by 25 basis points to 1 per cent. 

In his first Monetary Policy Statement for the year Governor Adrian Orr indicated further rate hikes were coming. 

"The [Monetary Policy] Committee agreed that further removal of monetary policy stimulus is expected over time given the medium-term outlook for growth and employment, and the upside risks to inflation," he said. 

The Reserve Bank is now forecasting the OCR to peak at 3.25 per cent by 2023. In its November statement it had forecast a peak of 2.5 per cent. 

The Committee also agreed to commence the gradual reduction of the Reserve Bank's bond holdings under the Large Scale Asset Purchase (LSAP) programme - through both bond maturities and managed sales. 

Markets had put odds of about 20 per cent on the RBNZ delivering a double hike of 50 basis points. 

In the end it appears to have been a close run thing. 

"When deciding whether to move the OCR up by 25 or 50 basis points, many members saw this as a finely balanced decision," Orr said in the statement. 

"When considering the case for a 50 basis point increase, the Committee noted the high starting point for inflation and the drift upwards in measures of inflation expectations." 

But when considering the case for a 25 basis point increase, members noted that interest rates had already increased significantly late last year, and were expected to continue rising as the OCR is progressively increased. 

They also noted that conditional on the outlook, the OCR was expected to peak at a higher level than assumed at the November statement. 

In addition, sales of the Bank's LSAP bond holdings could put some upward pressure on longer-term interest rates. 

The New Zealand dollar firmed to US67.55c compared with US67.38c just before the 2pm release of the monetary policy statement, while local bond yields were barely changed. 

The Committee said global inflation was expected to peak during 2022 and then moderate, as supply disruptions were gradually resolved. 

"However, global inflation is currently higher, and expected to ease more gradually than anticipated in the November Statement." 

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