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Orr focuses on interest rate hike

Tom PullarStrecker tom.pullar-strecker @stuff.co.nz

Adrian Orr has shut down questions on whether he would make himself available for a second five-year term as Reserve Bank governor next year, after his current term expires.

Speaking at a media conference explaining the Reserve Bank’s latest monetary policy statement which saw the central bank raise the official cash rate by 50 basis points to 3%, Orr said his candidacy was not something he wanted to talk about.

The Reserve Bank has come in for a spate of criticism over the past few weeks, including from former governor Graeme Wheeler, over claims its monetary policies during the earlier stages of the Covid pandemic were too loose and resulted in inflation getting of hand.

Orr said he did regret that people were experiencing ‘‘the ongoing tails of Covid and current high inflation’’ but said the role of the bank was ‘‘about playing the cards that are in your hand at the time, as best as you can through time’’.

The bank would be conducting a review of its monetary policies over the past five years and that would involve seeking the views of independent overseas experts, he said.

Orr said the role involved receiving ‘‘feedback and criticism’’, and it was important the bank was seen as a learning institution, ‘‘which we are’’.

‘‘I don’t like it when it is claimed we aren’t a learning institution; we are spending an enormous amount of time being incredibly transparent about how we are adapting and evolving,’’ he said.

The Reserve Bank hiked the official cash rate (OCR) by 50 basis points to 3% yesterday as it continued to tighten monetary policy to bring down inflation.

The central bank said it remained appropriate to continue to tighten monetary conditions ‘‘at pace’’ to maintain price stability and contribute to maximum sustainable employment.

Core consumer price inflation remained too high and labour resources remained scarce, it said.

The central bank also tweaked its expectations of the changes it would make to the OCR over the next few years, until September 2025, suggesting interest rates could rise a bit faster than it had previously predicted.

Its official forecast now sees the OCR peak at 4.1% from the middle of next year, rather than at 3.9%.

But since the bank has traditionally only moved the OCR in increments of at least 25 basis points, that would still imply the OCR is likely to top out at 4% during the current economic cycle.

Its previous monetary policy statement in May had implied the OCR would only reach its peak by the middle of next year and would stay at about 4% until late the following year, before then starting to slowly drop.

But its new forecast sees the OCR reaching 4% by March.

The Reserve Bank’s forecasts may not necessarily prove accurate; this time last year it was forecasting the OCR would currently be about 1.25%, rather than 3%, for example.

But they can have an immediate bearing on where banks choose to set their longer-term mortgage and deposit rates.

Kiwibank said it would pass on the full increase in the OCR to its online call savings accounts and variable mortgage rate but was making no change to its fixed-term mortgage or term deposit rates.

Product manager Richard McLay said the last time variable deposit rates were this high was in 2019.

The Reserve Bank forecast annual inflation would drop to 6.4% when Stats NZ reports prices for the three months to the end of September, which would be down from its last recorded level of 7.3%.

But it does not now expect inflation to drop back under 3% until June 2024, which is nine months later than it had predicted in May.

It is also now expecting unemployment to rise to 5% in 2025, which is above its previous 4.7% forecast.

The financial initial response on markets suggested traders viewed the monetary policy statement as being somewhat hawkish.

The New Zealand dollar gained about half a US cent to trade at US63.8c in the wake of the announcement and the yield on two-year government bonds also edged up.

Capital Economics economist Marcel Thieliant said the Reserve Bank’s statement signalled it would raise the OCR by a further 50 basis points to 3.5% in October.

‘‘The statement sounded a bit more downbeat about the outlook for activity as the bank sharply revised lower its forecast for residential investment, which it now expects to fall by a cumulative 6% over the coming quarters,’’ he said.

‘‘However, the accompanying monetary policy statement reiterated that employment is ‘well above its maximum sustainable level’,’’ he also noted.

ASB chief economist Nick Tuffley said another 50bp raise in October was ‘‘odds on’’.

‘‘A few details suggest the Reserve Bank has a greater propensity to keep hiking. The record of the meeting noted there was talk about whether or not to lift by more than 50bp, which flags where the Reserve Bank sees the risks around the OCR at the moment,’’ he said.

But Orr said its next move in October was not yet decided.

‘‘We would never predetermine what we were going to do – why would you?’’

Westpac acting chief economist Michael Gordon said the monetary policy statement was consistent with its forecasts. ‘‘However, we remain of the view that tightening is unlikely to continue into next year. We differ from the Reserve Bank in that we see early signs that higher interest rates are having the desired impact in terms of cooling domestic demand.’’

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2022-08-18T07:00:00.0000000Z

2022-08-18T07:00:00.0000000Z

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