RBNZ lifts official cash rate by 50 bps

The monetary policy committee, which is comprised of three Reserve Bank of New Zealand (RBNZ) officials, agreed that increasing New Zealand’s official cash rate was necessary to return inflation to the 1–3 per cent target range over the medium term.

The committee noted the level of economic activity over the December quarter was “lower than anticipated” during its February monetary policy statement and that there are signs of capacity pressures in the economy easing.

“However, demand continues to significantly outpace the economy’s supply capacity, thereby maintaining pressure on annual inflation,” RBNZ said in its statement.

Furthermore, severe weather events in New Zealand’s North Island resulted in higher prices for some goods and services. The committee anticipates economic activity to be supported by rebuilding efforts in the wake of these weather events over the medium term.

“The Committee agreed that the official cash rate (OCR) needs to be at a level that will reduce inflation and inflation expectations to within the target range over the medium term,” it stated.

“The Committee agreed that maintaining the current level of lending rates for households and businesses is necessary to achieve this, along with a rise in deposit rates. New Zealand’s financial system is well positioned to manage through a period of slower economic activity.”

Chief economist Kelly Eckhold and senior economist Michael Gordon at Westpac NZ said the RBNZ's hike was "larger than expected" and "reflects a determination to get the OCR to where it needs to be quickly". 

"We expect a further 25bp hike to 5.50% in May, though the balance of risks is towards an even higher peak than that," Mr Eckhold and Mr Gordon said. 

"The tone of the accompanying statement was firmly focused on the challenge of bringing inflation, and inflation expectations, down from what are still very elevated levels. 

"Given that today’s move already puts us above the 5% peak that we had in our OCR forecasts, we’ve revised our view accordingly," they stated. 

The economists further said the RBNZ's move was "in contrast to many of its overseas peers, who have tended to look to slow the pace of increase after last year's flurry of rate hikes". 

Mr Eckhold and Mr Gordon noted the Reserve Bank of Australia's (RBA) decision to pause yesterday (4 April) in particular. 

"The difference in approach is striking given that most developed countries are facing similar economic conditions and similar sources of inflation pressures," Mr Eckhold and Mr Gordon stated.

RBNZ releases DTI framework

The RBNZ announced the decision to add debt-to-income (DTI) restrictions to its macroprudential policy toolkit in April 2022, with a public consultation on the exposure draft of the DTI framework being held in November 2022.

The finalised framework will be released along with a regulatory impact statement, a non-technical summary as well as a summary of submissions document that contains the central bank’s responses to key issues raised in the consultation.

The director of prudential policy for the RBNZ, Kate Le Quesne, stated the publication of the framework doesn’t immediately activate DTI restrictions or set a calibration for them.

Ms Le Quesne clarified that instead, it provides banks with clearness on the terms and definitions of debt, income and future date reporting requirements, while providing a time frame for making any changes to internal systems and processes in order to comply with possible future DTI restrictions.

“DTI restrictions on residential mortgage lending, when implemented, set limits on the amount of debt borrowers can take on relative to their income,” Ms Le Quesne said.

“This supports financial stability by limiting higher-risk mortgage lending, thus reducing the likelihood of a future housing-related financial crisis.”

Ms Le Quesne added that this will help meet the RBNZ’s statutory objective of “promoting the maintenance of a sound and efficient financial system”.

“By linking credit availability to income growth, DTI restrictions complement other tools we use to support financial stability, including loan-to-value ratio (LVR) restrictions on residential mortgage lending,” she said.

“Stakeholders were generally supportive of the proposed design of the DTI framework and agreed with our overall approach to keep the framework simple and clear.”

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