Interest rates have gone up again. Why it won’t affect the prices that matter most
The Reserve Bank has increased the official cash rate to 2.75%. But much of the inflation affecting New Zealand wallets is imported and beyond the bank’s control.
The Reserve Bank of New Zealand has increased the official cash rate (OCR) by 0.25 basis points to 2.75%, as expected, in a decision that will impact mortgage rates, business confidence, and household budgets. The OCR is a key tool for maintaining price stability, but it primarily influences non-tradable inflation, or the prices of domestically produced goods and services.
Currently, non-tradable inflation is largely stable, while tradable inflation, driven by fuel prices and other imported goods, has risen significantly. In fact, if not for the substantial increase in fuel prices, headline inflation would have been around 2.9%, staying within the Reserve Bank's target band. However, factors beyond New Zealand's control, such as the Middle East conflict and disruptions to shipping routes, have led to a surge in tradable inflation.
These events have caused fuel and fertiliser prices to soar, directly impacting food and energy costs. While the OCR change might help bring non-tradable inflation below the 3% target, it may not be sufficient if tradable inflation continues to rise. The OCR, while a valuable tool for combating demand-driven inflation, cannot lower oil prices or guarantee safe passage through the Red Sea, which poses considerable risks to the economy.
Written by urgent.news from The Conversation AU's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
