With the Reserve Bank (RBNZ) expected to increase the Official Cash Rate (OCR) by up to 75 basis points on Wednesday it's worth noting something significant. The OCR has never been increased by that much in a solitary review before.
That's right. Since the OCR was introduced in 1999, the RBNZ has never increased it by more than 50 basis points at a time.
In contrast, the OCR has certainly been lowered by more, much more, than 50 basis points. Indeed, in December 2008 and again in January 2009, the OCR was cut by 150 basis points during the Global Financial Crisis, going from 6.50% to 3.50%.
With the the Consumers Price Index (CPI) hitting a 32-year high of 7.3% in the June quarter, only dropping slightly to 7.2% in the September quarter, and inflation expectations remaining high, it's seen as likely the RBNZ will hike 75 basis points on Wednesday, its final scheduled OCR review of 2022.
Following its introduction in March 1999 as the RBNZ's primary monetary policy tool, the OCR was first increased - by 50 basis points - in November 1999 to 5%.
But in its 23 years the OCR's never been increased in the way it has over the past 13-months. And that reflects the fact inflation has got so far above the RBNZ's target of keeping annual increases in the CPI between 1% and 3% on average over the medium term, with a focus on keeping future average inflation near the 2% target midpoint.
Since October 2021 the RBNZ has increased the OCR from just 0.25% to 3.50% now. That's 325 basis points of increases so far since the beginning of this 'tightening cycle', with 275 basis points coming in 2022 so far. That's already a record amount in one calendar year, with 50 basis points increases in each of April, May, July, August and October, and 25 basis points in February.
But a 75 basis points OCR increase, should it happen on Wednesday, November 23, would be unprecedented.
Prior to the introduction of the OCR the RBNZ used a variety of tools to target inflation. These included influencing the supply of money and indicating desired monetary conditions to the financial markets. You can see more on what the OCR is and how it works from the RBNZ here.
36 Comments
HW2, even if your disclaimer is true, do you care how a rate hike of this size might affect others?
For example, have you considered those who bought in the last 24 months? In 2020/2021, you were active in recommending they go hard out and buy. People are starting to hurt out there.
by HW2 | 22nd Nov 21, 8:59pm
"If you are smart you will never ever lose from property, everyone's a winner baby.... almost everyone"
The problem with this irresponsible post of yours is that almost everyone feels smart while they're signing the mortgage documents!
HW2, its obvious you forgot you posted that. The right thing to do would have been an apology for calling me a liar. You chose the weakest move and deflected with fantasy. You really are spineless.
I will leave you, pa1nter, Nifty1 and any other usernames you might have stashed away to reflect on can only be best described as desperate behavior.
If you know the exact phrase word for word you can put into the address bar of your browser:
site:interest.co.nz HW2 "If you are smart you will never ever lose from property, everyone's a winner baby.... almost everyone"
Even if you put in a couple of key words that the commentator is known to use frequently it should work.
Indeed, in December 2008 and again in January 2009, the OCR was cut by 150 basis points during the Global Financial Crisis, going from 6.50% to 3.50%.
So they have changed the OCR during the Christmas break, in the past.
As other people have already commented on this forum, surely the RBNZ can hold a few emergency meetings over the holidays to tweak the OCR as needed?
It seems pretty clear that 3 months is too long between OCR reviews, considering how fast things are changing globally.
Another point of interest; remember that the OCR was suddenly dropped by 50bps way back in August 2019. No pandemic, no war, just an economy on the brink of recession.
We've been circling the drain for a while now, and rather than being the root cause, global events may in fact have helped us kick the can down the road a little bit longer.
... but , in 2020/21 we only had a nasty flu virus doing the rounds ... no recession ... quite the reverse , the economy was humming along nicely before Orr & Robbo went into full blown panic mode & created $ 50 billion of cheap money to juice the system ...
So now , these high paid brainiacs must raise the OCR high enough to kill off the excess demand they caused ... destroy some businesses & jobs in the process ... to tame the inflation which they created ... have I got that right ? ... am I in a parallel universe where this sh*t makes sense ?
Historically true, however with the amount of debt burden that has recently become normal and all those overleveraged investors I'd conclude an OCR equal to inflation should do the trick. That being said, at the current rate increases are being made we'll likely be in the higher range for much longer or until recession/depression panic sets in.
Not really, it's just that an OCR lower than the rate of inflation is stimulatory because you are keeping the real rate of interest negative.
Some would suggest it needs to be a Number that takes the OCR Past the Inflation Level.
The Taylor Rule.
https://www.stuff.co.nz/opinion/300718332/damien-grant-reserve-bank-isn…
What happens if the created deposit ends up in a different bank though? The bank then looses an equal amount of its reserves which it must try to regain by attracting back the deposit with a competitive interest rate.
The RB controls the levels of reserves in the banking system and so the demand for reserves by the banks through the use of government bonds and this is how the OCR is set. Government borrowing is an interest rate mechanism and not a funding procedure.
https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/programs/…
If they want to help exporters and get inflation under control, they would raise it 1% IMO now. It is odd to hear all these property exports saying they expect the RB to drop the OCR back down after inflation is under control. PLus many are also saying that now is a good time to buy a house, even though some are also contradicting this by saying they expect house prices to fall further. I wonder why they are saying that apart from trying to get house sales moving again for commissions
Just a 75 bps increase is way too low. Until the OCR is raised to 5.5% (at the very least), this timid tightening will have no traction on this rampant inflation.
If Orr does not raise by 100 bps now, with a clear indication that another 100 bps increase is clearly on the cards for next February, inflation will keep increasing and entrenching into the economy, and Orr will be forced to a 6% peak by mid/end next year.
The ASB economists now expect an OCR peak of 5.25% - this is way too optimistic, as they are assuming that the RBNZ will be successful in reducing inflation. Given the incompetence and timidity of the RBNZ, I now expect an OCR peak of 6% next year, with mortgages close to 8%.
While the FLP program has ended, mostly, would banks that borrowed on long terms be worried about the rate changing?
E.g., if they took 100 million back in 2020 when the OCR was 1.5%, and set the term for 5 years, they'll be paying 4%~6% for it over the next few years. If they lent it out at 5% it won't be long before they will be making a loss.
Have I got that right, or have banks already repaid what they borrowed before the OCR got too high for their tastes?
https://www.rbnz.govt.nz/monetary-policy/monetary-policy-tools/funding-…
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