The Reserve Bank has announced the first increase in cash rates in seven years.

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To combat rising inflationary pressures, the Reserve Bank of New Zealand (RBNZ) ignored the Covid-19 outbreak and raised the official cash rate (OCR) for the first time in seven years.

Governor of the Reserve Bank Adrian Orr.

Reserve Bank governor Adrian Orr. Photo: RNZ / Dom Thomas

It raised the OCR by a quarter of a percentage point to 0.5 percent, as expected, because of strongly rising prices, a hot housing market, and tight labour market.

The RBNZ’s Monetary Policy Committee said the rise was justified even though the economy was likely to take a sharp hit from the current outbreak and lockdowns.

“The current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement.”

It said household and business activity has been strong going into the shutdown and it was expected to rebound as it had previously.

“Ongoing fiscal policy support, and a strong terms of trade provide confidence that economic activity will recover quickly as alert level restrictions ease. Recent economic indicators support this picture,” the committee said in a statement.

The RBNZ had been expected to raise rates in August, but decided at the last minute to keep rates unchanged because of the Covid uncertainty.

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It acknowledged some businesses would be “badly affected” by the lockdowns but decided it needed to act to meet its target of maximum employment and inflation anchored around 2 percent.

“There will be longer-term implications for economic activity both domestically and internationally from the pandemic,” adding the way to lessen the impact and disruptions was vaccination.

It also signalled further rate rises are coming.

“Further removal of monetary policy stimulus is expected over time, with future moves contingent on the medium-term outlook for inflation and employment.”

Kiwibank chief economist Jarrod Kerr said it was clear that the central bank felt it could wait no longer.

“The Kiwi economy has solid momentum and the RBNZ has good reason to withdraw stimulus.

“And the RBNZ won’t stop here. October marks the beginning of a new chapter for the cash rate: Onwards and upwards.”

He expected a similar sized rate rise in November, February, and May, when the RBNZ would have a pause.

Retail banks had a mixed reaction to the decision.

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ASB gave a commitment not to change rates this year, ANZ said it would pass on about half of the OCR by lifting loan rates by 15 basis points, while Kiwibank passed on the full amount to its floating mortgages and some of its deposit rates.

All 20 economists polled by Reuters ahead of the announcement believed New Zealand’s official cash rate would be moved upwards from its record low 0.25 percent, to 0.5 percent.

The move has been seen as necessary to cool inflation, which is running at its fastest growth rate in more than a decade, unemployment is down to 4 percent, and soaring house prices also factor into the decision.

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