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The RBNZ's official cash rate increase will have little effect on inflation

It has been amusing to read the commentators in the mainstream media discuss the Reserve Bank's Official Cash Rate (OCR) rise. They actually think it will have a big effect in terms of quelling inflation (!) The NZ Herald's Business-Editor-At-Large writes how "today's move was a clear signal that the RBNZ is prepared to front load the hikes in an effort to get ahead of the inflation curve".


The Herald must be kidding. With inflation expected to shortly rise to around 7 percentage points, the idea that a 0.50 percentage point increase in the OCR will have any kind of significant effect on inflation is ludicrous.


So why do it? The rate rise is just a Public Relations / Comms exercise of the type that we've come to expect from this Government-and-RBNZ-of-Spin. It is about giving the appearance of concern for inflation.


What's the basis for such claims? To quell an inflationary shock requires an increase in the OCR of greater than one percentage point for every one percentage point increase in the inflation rate (according to the Taylor Rule). Inflation as at March 2021 was 1.5%. Inflation as at March 2022 is expected to be 6.6%. So to get "ahead of the inflation curve", an increase in the OCR of at least 5.1 percentage points would have been required over this period (=6.6 minus 1.5).


Yet the RBNZ has only increased the OCR by a little over ONE percentage point the past year. The Taylor Rule exposes the Bank's complete disregard for its legal mandate - which is to keep inflation in the 1 to 3 percentage point range.


After having kept the OCR so low for so long on top of its' $60 billion Quantitative Easing Program which sent house prices berserk & led to a borrowing binge, the RBNZ is panicking at the prospect of a reversal that will reveal its past mistakes. So it is now playing politics and trying to deflect anger, not conducting best-practice monetary policy.


By doing so, what's scary is that the Bank has taken the country to the casino. It is gambling that the current inflationary shocks are transitory & will quickly reverse. To the extent inflation does fall in the coming year or two, it will have little to do with this OCR rise.


Yes, the Bank is playing our politicians and the Kiwi media for fools. It is pretending to be concerned about inflation by increasing the OCR when in fact the tiny size of its interest rate hikes will have little impact on inflation outcomes in NZ.


Sources:

https://www.nzherald.co.nz/business/double-hike-to-ocr-signals-rbnz-ready-to-move-faster-on-inflation/44QOTTJTCNWPWMLDVWFNSHGTTE/


https://www.brookings.edu/blog/ben-bernanke/2015/04/28/the-taylor-rule-a-benchmark-for-monetary-policy/


https://www.rbnz.govt.nz/monetary-policy/inflation


https://www.stats.govt.nz/indicators/consumers-price-index-cpi