Monetary Policy Committee Raises Official Cash to 4.75%

Forex news today, February 22, 2023 regarding the discussion of the Official Cash Rate (OCR) agreement. Based on the daily information that we summarized through the rbnz.govt.nz page, the OCR still needs to be increased as indicated by the statement in November, to ensure that inflation is within the target range in the medium term. Despite signs of easing price pressures, core CPI inflation still looks too high, and employment is still at the maximum level that can be maintained, coupled with short-term inflation expectations that are also still high. 

Severe weather events such as Cyclone Gabrielle and others have had a devastating impact on people's lives in New Zealand. It is too early to accurately assess monetary policy, given that the scale of the collapse and disruption of the new economy is now becoming clearer. The committee assesses that over the next few weeks, prices for some goods will soar and activity will weaken. Export revenue will also be negatively impacted. Monetary policy will focus on the medium term, then the Committee will also review short-term output variations and direct price effects. When the time comes, infrastructure development will return and people will increase their activities and suppress inflation, especially given the constraints on the capacity that exist in the economy. 

Forex News Today - Summary of the Monetary Policy Committee Meeting

The committees discussed developments on matters affecting the inflation and employment outlook in New Zealand. The economy is expanding broadly in line with expectations in the November statement. Inflation is currently too high and employment is outside the maximum level. Koimte agreed that it should continue to raise the OCR in hopes of bringing the inflation figure back to the target.

As previously explained regarding the weather events experienced in New Zealand, monetary policy focuses on the medium level. The committee also decided to review short-term prices directly from extreme weather events, so they focused on the medium-term impact on inflation and the sustainable employment maximum. In addition, the Committee also agreed that in addition to monetary policy, there is fiscal policy that acts to reduce demand in the economy. It assumes that government consumption and investment are expected to decline as part of the economy in the coming years. Members are more likely to see the risk of inflationary pressures from fiscal policy likely to rise, given further demand for government services amid rising supply costs.

In addition, the economic impact of the government's response to the recent severe weather will depend on the scale of the damage, the timing of the activity, the funding of how the fiscal costs are funded. The committee discussed the amount of OCR in the content of the meeting, with increases at 50 and 75 bps to be considered. They assessed, while the balance of risk is around inflation but tends to be upwards, so the level of risk has decreased slightly since the November statement. This results in a 50 bps move that requires certainty from a decline in core inflation and inflation expectations, against early signs that demand is slowing towards the productive capacity of the economy. The committee then raised the OCR by 50 bps from 4.25% to 4.75% on Wednesday, February 22, 2023. 

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