The Reserve Bank of New Zealand (RBNZ) announced that it had raised the official cash rate (OCR) by 75 basis points to 4.25%. This is the biggest hike it has carried out since the global financial crisis of 2008 and considerably higher than the market had anticipated. The RBNZ is also forecasting that the GDP will temporarily contract by about 1% from 2023 due to the ongoing fall in aggregate demand.
It estimates that the OCR will rise to a peak level of 5.5% in 2023, with the country likely to fall into a recession mid-year. It is bad news for mortgage borrowers as this points to fixed mortgage rates likely to reach 7% or higher by next year.
As the country struggles with high inflation and labour shortages, some economic contraction is expected. The RBNZ does not view limiting interest rate increases as a suitable approach to avoiding this economic contraction. Members estimate that limiting interest rates would rather prolong the period of high inflation.
Governor Adrian Orr is recommending that people lower their level of spending to help control inflation. He advises kiwis to switch to saving rather than spending, although he admits the forecasted recession is likely to lead to shallow economic contraction.
Experts predict that if the recession ends up being shallow or less severe, it will not create much impact on household spending. Due to rising inflation and living costs, people are being compelled to spend more anyway. However, if the recession persists, it may lead to rising unemployment and more struggling businesses. The RBNZ is predicting that official unemployment will rise from the current 3.3% to 5.7% in 2025.
The huge OCR hike is an attempt by the RBNZ to control inflation that reached an annual rate of 7.3% in the June quarter and was only slightly reduced to 7.2% as of September. Governor Orr said that there was a need to keep tightening monetary conditions that would compel sufficient restraint and bring inflation back down to its 1% to 3% per annum target range.
Finance Minister Grant Robertson has stated that though the news of a recession was sobering, it was not unexpected. He said that the Labour Party had warned that 2023 would be a difficult year and had prepared for this. He confirmed that the party would work to bring down government spending as a percentage of GDP back down to pre-pandemic levels. He however refused to confirm if the government intended to rule out a tax cut package.
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