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06-10-2021

Official Cash rate increased to 0.50 percent

The Monetary Policy Committee agreed to increase the Official Cash Rate (OCR) to 0.50 per cent. Consistent with their assessment at the time of the August Statement, it is appropriate to continue reducing the level of monetary stimulus so as to maintain low inflation and support maximum sustainable employment.

The level of global economic activity has continued to recover, supported by accommodative monetary and fiscal settings, and rising vaccination rates enabling a relaxation of mobility restrictions. While economic uncertainty remains elevated due to the prevalent impact of COVID-19, cost pressures are becoming more persistent and some central banks have started the process of reducing monetary policy stimulus.

New Zealand’s public health settings are also evolving as domestic vaccination rates rise. The higher the vaccination rate, the less virus-related disruption there will be to New Zealand’s economic activity over coming years.

The current COVID-19-related restrictions have not materially changed the medium-term outlook for inflation and employment since the August Statement. Capacity pressures remain evident in the economy, particularly in the labour market. A broad range of economic indicators highlight that the New Zealand economy has been performing strongly in aggregate.

While the economy contracted sharply during the recent nationwide health-related lockdown, household and business balance sheet strength, ongoing fiscal policy support, and a strong terms of trade provide confidence that economic activity will recover quickly as alert level restrictions ease. Recent economic indicators support this picture.

However, the Committee is aware that the latest COVID-19 restrictions have badly affected some businesses in Auckland and a range of service industries more broadly. There will be longer-term implications for economic activity both domestically and internationally from the pandemic.

Headline CPI inflation is expected to increase above 4 percent in the near term before returning towards the 2 percent midpoint over the medium term. The near-term rise in inflation is accentuated by higher oil prices, rising transport costs and the impact of supply shortfalls. These immediate relative price shocks risk leading to more generalised price rises. At this time, measures of core inflation and medium-term inflation expectations remain close to 2 percent.

The Committee noted that further removal of monetary policy stimulus is expected over time, with future moves contingent on the medium-term outlook for inflation and employment.

Summary record of the Monetary Policy Committee here

 

Tags: reserve bank

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