With the Reserve Bank lifting the official cash rate, Finance Minister Nicola Willis is downplaying the likelihood of further rises this year.
The 25 basis point increase to 2.5 percent came in response to spikes in inflation from the Middle East war.
This increases borrowing costs, including for mortgage holders – although commentators believe many banks have already priced increases in.
The Monetary Policy Committee (MPC) – which sets the rate – says with inflation still above target and economic activity increasing, further OCR hikes are “likely to be required to return inflation to the 2 percent target mid-point”.
Willis pushed back when asked if that meant things would get worse for households before they got better.
“Whether or not the Reserve Bank will make future decisions to lift interest rates is too soon to determine. In fact, the Reserve Bank are very clear in their statement that they will be watching the incoming data and that it is far too soon for them to commit to that course of action at this point,” she said.
The committee noted that with inflation pressure easing as a result of a ceasefire in the Middle East, stronger inflation in the medium term would depend on “the extent to which recent cost increases feed through into higher prices”.
Willis said the lower petrol prices in recent weeks as a result of the ceasefire meant people were more confident in being able to spend, leading to faster growth.
However, that growth can also lead to higher inflation if demand outpaces supplies.
“The Reserve Bank is essentially saying such is their confidence in a strengthening economy that they think they now need to be very careful to watch that inflation doesn’t stay out of control,” Willis said.
She said in contrast to the previous Labour government, she had avoided “highly stimulatory spending behaviour” and National had also refocused the Reserve Bank on inflation alone, rather than requiring it to take account of unemployment.
“We have simply not increased spending at the rate that the last government did. We have taken careful fiscal decisions,” she said. “My opponents have said that I should be spending more, they have opposed every reduction we have done across government services, changes to policies, which we have needed to do to clean up the fiscal mess left to us.”
Willis said having inflation under control was needed to keep “sustainably high employment”, blaming current high unemployment rates on the rampant inflation that followed the Covid pandemic.
“We went through a period where inflation got completely out of control, got up to more than 7 percent stayed out of band for years on end, and then the crash after that has been extremely painful and has led to many New Zealanders losing their jobs. I don’t want to repeat that history,” she said.
“The evidence from around the world is giving your Reserve Bank a single mandate makes them focused on keeping inflation affordable, and that’s good for all New Zealanders.”
Barbara Edmonds.
RNZ / Marika Khabazi
In a statement, Labour said the OCR hike meant higher mortgage payments for families already struggling with the rising cost of living under National.
“National promised to fix the cost of living, but two and a half years on, their record is higher costs and higher unemployment,” Labour’s Finance spokesperson Barbara Edmonds said.
“Power prices have gone up 20 percent in two years. Everyday food items like mince and milk are more expensive. Seeing a doctor costs more, and now mortgages are set to go up too.
“Christopher Luxon and Nicola Willis were quick to take credit when mortgage rates came down. They need to take responsibility now they’re set to go back up. National’s flawed plan was to let the Reserve Bank do the heavy lifting but this just shows they have no plan.”
Edmonds said New Zealand needed a government that was focused on helping people with the higher cost of living, and making the economy more productive, but “instead, Christopher Luxon is making things worse”.
