Auckland (The NZ Today)
The Reserve Bank is preparing to announce its latest interest-rate decision on Wednesday, in what could become a relatively rare OCR increase during the final days of a New Zealand election campaign.
The Official Cash Rate currently sits at 2.75 percent, after the Reserve Bank raised it in September, and another decision is due at 2pm on October 28.
Economists cited by RNZ expect the central bank could lift the rate by another 25 basis points as it continues trying to bring inflation back under control.
Annual inflation is currently running at 3.7 percent, above the Reserve Bank’s 1-to-3 percent target range.
Higher fuel prices have been one of the major pressures behind the recent inflation increase, with the Reserve Bank already pointing to the impact of international conflict on petrol and diesel costs when it lifted the OCR in September.
What makes Wednesday’s decision unusual is its timing.
The announcement comes while advance voting is already underway and only days before the November 7 general election.
Infometrics chief forecaster Gareth Kiernan told RNZ that the Reserve Bank has changed interest rates during election campaigns before, but such moves are relatively uncommon.
The most recent example was in July 2014, when the OCR was increased by 25 basis points ahead of that year’s September election.
Earlier examples include a substantial OCR cut shortly before the 2008 election, as well as increases during the 2002 and 1999 campaigns.
However, the Reserve Bank operates independently of the Government and is not required to take the political calendar into account when setting monetary policy.
Its mandate is focused on price stability, with the central bank using the OCR to influence borrowing and saving rates across the economy.
The Reserve Bank says its inflation target is between 1 and 3 percent over the medium term, with a focus on returning inflation towards the 2 percent midpoint.
Economists told RNZ that delaying a rate move simply because an election is approaching could itself raise questions about political influence.
Westpac chief economist Kelly Eckhold said the possibility of further tightening had already been well signalled, meaning any increase would not necessarily come as a surprise to financial markets.
The debate also comes at a difficult time for households.
Higher OCR settings can feed through into mortgage, business lending and deposit rates, although the effect is not immediate for everyone because many borrowers have fixed-rate mortgages.
Simplicity chief economist Shamubeel Eaqub told RNZ that borrowers would generally feel the impact when their existing fixed terms expire rather than immediately after an OCR announcement.
At the same time, the Reserve Bank faces pressure from inflation remaining above target even as many households continue to report cost-of-living pressures.
The economy has also returned to growth, adding to the central bank’s assessment of whether demand remains strong enough to keep inflation elevated.
The Reserve Bank’s September decision lifted the OCR from 2.50 to 2.75 percent, its second consecutive increase, as policymakers responded to inflationary pressures.
Wednesday’s decision will therefore be closely watched not only by homeowners and financial markets, but also because of its timing in the middle of the election campaign.
Source: Reserve Bank of New Zealand and RNZ
