Reserve Bank lifts OCR by another 50 points

Reserve Bank Governor Adrian Orr has lifted the official cash rate (OCR) by 50 basis points, to 4.75 per cent, despite billions of damage the economy faces after Cyclone Gabrielle.

The Reserve Bank still sees the official cash rate peaking at 5.5 per cent despite the devastation from Cyclone Gabrielle.

The Monetary Policy Committee agreed that the OCR still needs to increase, as indicated in the November Statement, to ensure inflation returns to within its target range over the medium term.

It was too soon to accurately assess the monetary policy implications of Cyclone Gabrielle, they said.

“Cyclone Gabrielle and other recent severe weather events have had a devastating effect on the lives of many New Zealanders,” the committee said.

“It is too early to accurately assess the monetary policy implications of these weather events, given that the scale of destruction and economic disruption are only now becoming evident. The timing, size, and the nature of funding the Government’s fiscal response are also yet to be determined.”

Over coming weeks, prices for some goods are likely to spike and activity will be weaker than previously expected, they said.

“Export revenues will be negatively impacted. Monetary policy is set with a medium-term focus, and the Committee will look through these short-term output variations and direct price effects.

“In time, the infrastructure and community rebuild will add to activity and inflationary pressures, especially given existing capacity constraints in the economy.”

The New Zealand dollar rose about a third of a cent against the USD after the announcement - to US62.33c. In wholesale interest rates, the two-year swap rate was little-changed at 5.31 per cent.

The Committee discussed the size of the OCR increase. Increases of 50 and 75 basis points were considered.

The Committee assessed that, while the balance of risks around inflation remained skewed to the upside, the extent of this risk had moderated somewhat since the November Statement.

As a result, a 50 basis point move balanced the need to ensure core inflation and inflation expectations fall, against the early signs that demand was beginning to moderate towards the economy’s productive capacity.