OCR: Reserve Bank leaves interest rate on hold

The Reserve Bank Monetary Policy Committee has agreed to keep the Official Cash Rate (OCR) on hold at 0.25 per cent for now.

Today’s decision was made in the context of the Government’s imposition of Level 4 Covid restrictions on activity across New Zealand, Reserve Bank Governor Adrian Orr said.

The committee said that their “least regrets policy stance” was still to further reduce the level of monetary stimulus so as to anchor inflation expectations and continue to contribute to maximum sustainable employment.

But they agreed, however, to keep the OCR unchanged at this meeting given the heightened uncertainty with the country in a lockdown.

The New Zealand dollar dropped another half a US cent to US68.73c from US69.36cjust before the release.

The currency is now more than a cent down from US70.18c just before the announcement yesterday that the Delta variant had arrived in NZ.

“The first shock to the market was the ‘no hike’ but on closer inspection, the track seems to be consistent with hikes in October, November and February and then again in May next year.

The overall message to the market here is one of postponement rather than an abandonment of the desire to lift interest rates.” David Croy, senior markets strategist at ANZ, said.

“Capacity pressures are now evident in the economy, particularly in the labour market where job vacancies remain high despite the recent decline in unemployment and underemployment,” the Reserve Bank said.

Wages were rising consistent with the tight labour market conditions.

Broader inflation pressures were being accentuated in the near-term by one-off price rises such as higher oil prices, and temporary factors such as supply shortfalls and higher transport costs.

“Near-term consumer price inflation is expected to rise above the Committee’s target range before returning towards the 2 per cent midpoint around mid-2022”.

The committee was confident of meeting inflation and employment targets with less need for the existing level of monetary stimulus.

It also noted that house prices are above their sustainable level, heightening the risk of a price correction as supply increases.

-Additional reporting Jamie Gray

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