Liam Dann: Why the OCR had to rise, despite the lockdown pain


The Reserve Bank’s call to lift the official cash rate for the first time in more than seven years came as no surprise to anyone.

As ANZ chief economist Sharon Zollner put it, they had to hike.

“Following the August pause, they pretty much said that they’d be hiking today unless the Earth was hit by a meteorite,” she said.

Not delivering would likely have caused market pricing for any future hikes to collapse, she said.

Lifting rates slowly and steadily to stay ahead of the curve is clearly the right call.

Still there is something unsettling about rates rising with New Zealand’s economy still very much in the grip of lockdown constraints.

We know that the big macro-economic numbers – GDP and unemployment – are holding up well.

We know inflation is on the rise – both locally and around the world.

But understanding why rates have to rise requires us to look through the grim scenario of the outbreak we are living with and to brace for deeper more structural turmoil as we join the world in reopening for business in the coming months.

“The current Covid-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement,”the RBNZ Monetary Policy Committee said in its statement.

Ongoing government support and strong export prices have kept the economy relatively strong.

Inflationary forces (that might be described as temporary if we could actually see an end to them in sight) continue to build.

Shipping costs are rising, energy costs are rising, oil is back above US$80 a barrel and labour costs are rising across the world – all of which has been spooking global markets in the past few weeks.

There is talk of stagflation emerging if rebound growth starts to slow but cost rises don’t.

Most economists now expect further hikes in November and February.

But beyond February, prospects became more clouded, saidJohn Carran, Jarden economist and investment strategist.

“Power shortages in China are restraining production, exacerbating cost pressures and capacity constraints globally, which could prolong the supply side situation,” he said.

However, locally there were increasing risks to spending, if China’s production problems impacted its demand and New Zealand’s exports to China suffered.

“If steep cost rises and uncertainty about the economic outlook cause New Zealand businesses to pull back on their investment or hiring plans, this could dampen local households’ enthusiasm to spend,” Carran said.

“Spending could further be inhibited if New Zealand house prices materially wane as a result of recent tightening in LVR restrictions and government tax changes. These factors could take the wind out of the local labour market and inflation.”

This week though, strategic considerations probably hardly got a look in, said ANZ’s Zollner.

“This was a more ‘hawkish’ tone than it could have been, and very much suggests that the RBNZ found this to be a very straightforward decision.”

ANZ’s OCR forecasts remain unchanged, albeit with big caveats about global uncertainty.

They expect hikes in November, February, May and August, taking the OCR to 1.5 per cent.

“In short, the Covid outbreak must make a follow-up November hike a much less certain proposition than otherwise,” said Zollner.

“But there wasn’t much acknowledgement of that by the RBNZ, and a follow-up hike remains firmly odds on”.

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